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| Consultant's Corner |
by Siamak Razmazma |
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| Is your organization proactive or reactive? |
| The complex and diverse nature of supply chains makes them particularly vulnerable to risk. Some of these risks are external to the supply chain and outside of organization’s control such as natural disasters. Others are internal and, to a large extent, can be under organization’s control such as late deliveries, excess inventories, and stock out. Risks in supply chains may vary from some minor events to the complete destruction of the chain. It is a common practice that organizations try to use standard methods to mitigate the most tangible effects of the risks such as high stocks, spare capacities, and late deliveries. However, more than 70% of the organizations (particularly small and mid size companies trying to grow their global operations) tend to ignore risks to the supply chain, and take reactive actions when an unforeseen event actually occurs. In most situations, this reactive approach is too slow and too late to stop serious damages and negative results. A better approach is proactive, analyzing likely events before they occur and planning steps to mitigate their unwanted effects. |
| One of the most important reasons for organizations to be reactive resides in the fact that the business world is changing fast, putting organizations under constant pressure to adjust and restructure their supply chain. Organizations generally aim at two major strategies of cost leadership (lower costs) or product differentiation (better customer service). The new methods designed to achieve these strategic goals inadvertently increase risks to supply chains. For instance, an emphasis on cost reduction can remove all slack from the supply chain, but increases the risks of reduced financial and operational performance; improved and advanced computerized systems for information exchange and collaboration are essential, but they make the supply chain vulnerable to any functional or technical problem in the systems. |
| The question is “how can organizations create a balance between evolving supply chains’ benefits and inherent risks of the new methods aimed at achieving these goals?” The short answer is Supply Chain Risk Management (SCRM). In general, the context for supply chain risk management is laid by the organization’s general risk strategy. More specifically, the overall goal of the supply chain risk management is to ensure continuous, uninterrupted, consistent, and accurate flows of information and materials. |
| Unfortunately, at this point, there are no precise procedures or fully accepted standards for supply chain risk management, but there are some general principles and good practices such as the need to balance operational efficiency and risk, take a proactive approach to risk management, share information, reliable ERP (Enterprise Resource Planning) and SCM (Supply Chain Management) systems, and so on. These lead to the core areas of supply chain risk management which include risk identification, risk analysis, and risk mitigation. |
| Risk identification is certainly the most complex area of the supply chain risk management, as there are a huge number of possible risks and forms in which they appear. It is best to focus on the most significant types of risk relevant to a specific business organization and the classification of the risks into internal and external categories. Risk analysis means the assessment of the impact of the identified risks on the supply chain. Typically the organizations use a quantitative approach that is based on the likelihood of a risky event occurring and the consequences when it does occur. The result is shown as the probability and the consequences to be evaluated and judged by the supply chain process owners. The risk analysis stage provides a list of risks and their potential impact which is used to define the risk mitigation approaches. Based on circumstances, the usual risk mitigation alternatives are considered; i.e. ignore the risk, reduce the risk’s likelihood, reduce the risk’s consequences, transfer the risk, make contingency plans, adapt to risk, oppose the risk or move the risk to another environment. After deciding the most appropriate type of response, organization needs to implement the related actions. For example, when it is decided to reduce the likely consequences of a risk, they might keep more stocks, add spare capacity, increase agility, improve forecasts and planning, increase collaboration, adjust the inventory strategy such as enhancement of Make-to-Stock and so forth. |
| Regardless of the size of the organization or the complexity of the supply chain, it is virtually impossible to achieve an efficient supply chain risk management and to control its core areas (risk identification, risk analysis, risk mitigation) without relying on a proven methodology, expert knowledge, robust tools, and comprehensive good practices. As its most important component, an efficient supply chain risk management requires an optimized solution design of the information system that captures accurately and in a timely manner all the critical data across the supply chain. Most of the organizations who have tried to manage the supply chain risks without a structured methodology, appropriate tools, and domain expertise have ended up with reactive approaches and broken supply chains. Organizations can and should manage many of supply chain risks, and the key point is that they should not wait to see what damaging events occur and then start thinking about their response. Instead, they should be proactive, involving good practices and related expertise for planning their responses in advance. Then they are prepared and can take immediate action when an unexpected event actually occurs. |
| About the author: |
Siamak Razmazma has over 20 years of experience in design, optimization, and automation of business processes and enterprise systems in a wide range of mid-size and large organizations across different industries. Siamak has designed proven process models for good practices in communication, collaboration, and integration in outsourced supply chains and manufacturing. Siamak is expert in supply chain risk management with a great focus on the ERP and SCM systems. Siamak has in-depth knowledge of major systems including SAP, Oracle, Microsoft Dynamics (Great Plains, Solomon, Navision, Axapta), Expandable, and Epicor. Currently, Siamak works as a Director in Enterprise Application Solutions at Protiviti, Inc. which is a risk management company. Siamak can be reached at:
Protiviti Inc.
2880 Lakeside Drive, 3rd Floor
Santa Clara, CA 95054
Siamak.razmazma@protiviti.com |
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