Risks in Supply – An Omnipresent Danger
For more than a decade, I have implemented inventory optimization solutions for some of the world’s largest companies in industries ranging from life sciences to chemicals, from consumer goods to high-tech, and more. Throughout these projects, there is a consistent theme: organizations have a difficult time finding clarity in variability in supply.
Supply risks are omnipresent in every industry. They also tend to be transient. For example, companies can be in a period of severe shortage followed by an unforeseen abundance. These “boom-to-bust” cycles are caused by latencies in the supply chain. How one handles these ups and downs is the multi-million dollar question. Proactive companies that recognize bottleneck symptoms and utilize time-phased planning tend to be the ones that come out ahead once the incident passes. These companies have the ability to normalize their planning targets providing a competitive advantage. This isn’t magic. Rather, with the right processes and technology in place this can be a quick and seamless process.
Let’s take a look at a few examples of risk within an organization, how you can identify them, and how to minimize their impact.
Lack of Production Schedule Adherence
For various reasons (e.g. lack of available raw materials, non-deterministic lead times in Quality Assurance / Quality Control), reality may deviate from the planned production schedule. Often, the root cause may go unrecorded. For instance, a change in orders may prompt a schedule reshuffle. Events like these need to be isolated from the data so you don’t double dip on safety stock due to demand variabilities.
Once you are comfortable with the content of data, look for consistent delays in a process with statistical evidence, and then buffer with additional safety stocks. Often, this is not sufficient to remedy the supply issue as net requirements calculations are also affected by persistent delays.
Advice: To stay in front, speak with your production and deployment teams to collaborate and identify how to solve demand and supply mismatches. You may find your master data needs to be amended.
High Capacity Utilization
When companies are faced with high utilization of production assets, it may not be possible to attain inventory targets for an extended period. This can be particularly severe when demand variability and service expectations are high. All of this can lead to a supply shortage.
Typically, safety stock would be buffered to account for this shortage. However, don’t forget to factor in expected shortages over the replenishment lead time.
Advice: Best-in-class companies establish maximum production utilization targets in line with various costs, demand patterns, service needs, and other factors.
Supply disruptions can be expected and planned for, i.e., shutdowns for scheduled maintenance. Supply chain planning systems can account for this shutdown and pre-build inventory ahead of time within the confines of production resources. However, there may be a risk that customers on allocation could suffer service failures. The assumption is that prebuilt inventory will cover all the demand, but demand variability may persist longer than usual, creating increased exposure during the shutdowns.
Advice: Increase safety stocks and include this in the buildup. When production resumes, don’t forget to normalize targets.
It is common for many companies to discover large disparities around transportation and goods receipt processes. Looking at transactional order data and comparing actual lead times to standards in the system will quickly highlight these discrepancies. Data owners may not be accountable for all the activities throughout the deployment cycles: procurement of transport, loading/unloading, quality control and goods receipt, ordering cycles, customs clearance, and so on. Expected lead times and their variabilities should be carefully buffered and perhaps separately modeled.
Advice: Consider potential trade-offs where costs versus lead times/reliabilities are optimally balanced. While this may seem counter-intuitive, one option is to opt for a higher cost of transport if it lowers total supply chain cost through reduced inventory.
Supply risks increase as companies produce and deploy products globally, and rely more heavily on external partners. While we cannot predict all of the risks, we can take smart, proactive precautions against failures, and execute a coordinated plan. How are you managing risk?
Gokhan Usanmaz is the Director of Business Consulting at Logility. He can be reached at email@example.com