IBM Global Business Services
Supply Chain Risk Management: A Delicate Balancing Act
A multi-faceted view on managing risk in a globally integrated enterprise
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Table of Contents
Risk and Consequence: Tales from the Industry Supply Chain Risk Categories Disruptive Events, Uncertainty and Impact Models and Methods for Supply Chain Risk Management Example of Risk Management for IBM’s Product Supply Chains An Approach for Measuring the Impact of Identified Supply Chain Risks Key Lessons from IBM’s Supply Chain Risk Management Approach The Landscape: Supply Chain Risk Management Supply Chain Risk Management: Getting Started In Summary Authors Footnotes
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Risk management practices, techniques and tools have been used extensively in the financial community for years. Risks with respect to a company’s supply chain have begun to receive attention only more recently, as the push to increase supply chain efficiencies has illuminated the delicate balance between financial considerations and those of the customer. During the last twenty-odd years, supply chain management practices have evolved toward more lean process approaches in order to reduce waste within the overall chain. Concepts such as just-in- time, virtual inventory, supplier rationalization, and reductions in the number of distribution facilities have reduced total supply chain costs, but the result has been increased risk. Trade-offs between achieving optimal supply chain efficiencies and management of supply chain risk have created a conundrum of sorts. Businesses have witnessed many supply chain malfunctions (with substantial consequences) due to supply and demand disruptions: the affected companies reported, on average, 14% increase in inventories, 11% increase in cost, and 7% decrease in sales in the year following the disruption. 1, 2 Today’s industrial supply chains face risks from many factors, including: • • • Increased globalization through outsourcing, which elongates end-to-end supply chains Additional regulatory compliance imposed by government entities, further complicating international trade Increased levels of economic uncertainty, which create additional variability in demand and supply and make it more difficult to accomplish demandsupply balancing Shorter product lifecycles and rapid rates of technology change, which increase inventory obsolescence Demanding customers who have created additional time-to-market pressures by requiring better on-time delivery, order fill rates and overall service level efficiencies. Supply side capacity constraints, making it more difficult to meet demand requirements, and Natural disasters and external environmental events, which can wreak havoc on global supply chains.
The above list includes operational and catastrophic risks because they are both important for firms to consider. From an operational perspective, complex networks
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of suppliers, customers and third party service providers as well as large interdependencies among multiple firms exist, making inter-organizational coordination of risks a critical requirement. In addition, the leaner and more integrated supply chains become, the more likely it is that uncertainties, dynamics and accidents in one link will affect other links in the chain.3 Figure 1: Scatter Plot: Logarithmic Relationship between Forecast Error and Ship Volume (correlation coefficient = -0.59)
100% LOG (Forecast Error)
-150% LOG (Ship Volume) Let us take a closer look at a couple of examples. As commonly known, low volume items are hard to forecast. In Figure 1 (above), we have plotted the forecast errors of 288 components that are used in computer manufacturing against their demand volume. The chart shows that there is a clear logarithmic relationship between demand...
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