APICS Mission Peak – September 7, 2011
Risk management in supply chain:
Risk based inventory classification
Alex Rivlin
Risk management in supply chain
Agenda
Goals of risk management
Process, attention areas, best practices
Risk based inventory classification
Goals of risk management
Goals of risk management
Reduce loss of sales
Reduce expenses
Levels of risk management
Business
Continuity
Crisis
Management
Product
Resiliency
Supply Chain
Resiliency
Maturity of risk management
Acknowledge
(search)
Monitor (and
document)
Proactively look
for solutions
Types of risks
Missed
Raw Schedule
Out of Stock
Material
Supplier
Ability
to
grow
Supplier
E&O
Expedite charge
YOU $$
Management
Implement
solutions
Define &
Achieve
acceptable risk
tolerance
Drop in demand
Expedite charge
Management $$ End
Customer
customer
Risk management in supply chain
Agenda
Goals of risk management
Process, attention areas, best practices
Risk based inventory classification
Supply Chain Risk Management – history and background
Philips fire
•
•
Philips FAB in New Mexico manufactured RF chips for cell phones.
Ericsson and Nokia accounted for 40% of production.
March 17
2000
March 20
March 31
April 7
Outcome
• Fire hit
facilities
• 3 days
passed
• 14 days
passed
• 21 days
passed
Accepted Reallocation
Established daily monitoring
Escalated to VP of operations
Philips realized that extent of the damage is higher than expected
Re-design to accept alternative chip
Continued to wait
sent RFP to two alternate suppliers
acquired alternate capacity
Escalated the situation to executives
Pressed situation at CEO meetings
Reallocated production to Philips plant
in Shanghai and Eindhoven
Division 1.6B annual loss
Loss of market share
Sale to Sony
Emerged as a market leader
Supply Chain Risk Management – history and background
Cisco example
Goal
Scope
Process
Results
• Apply where it matters
• To support key SKU and key customers
• Partner financial strength
• Contention points in supply chain
• Know the supplier’s supply chain
• Include geography and distribution
• Mitigation framework
• IT support and analytics to measure impact
• Cross Training, support from Engineering, Marketing, Supply Chain
• Team of 8 people was able to achieve acceptable
risk tolerance for 45% of Cisco sales and sustain
multiple bankruptcies in the supply chain.
Gartner, “Case Study: Cisco Addresses Supply Chain Risk Management”, 2010
Supply Chain Risk Management – takeaway
• Does your company has risk management program in place?
Culture
Identification
Resolution
• Are abnormal events identified?
• When?
•
•
•
•
•
Is escalation path available?
Is analytics and support available
to estimate
impact?
Or you
inventtheall
of
Is framework in place for escalation, resolution, closure?
the above after the
Are cross training and second sourcing being proactively implemented?
fact?.....
Are all areas in the company
available to support event resolution?
Risk management process
ouch
Reporting to the
management
Wrong part I
Issues on the
shop floor
MANAGE
Reporting
Quality
Supply late
packing
High risk process
design, dependent on
single person with no
visibility
Agenda
Agenda
Goals of risk management
Process of risk management
Inventory risk management
Inventory related risks: Sample supply chain
Inventory related risks: controls and prevention
Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks
Sample supply chain
Price
Spend
10
500
500
5
Operation1
Operation2
Operation3
Item 1-1-1
Sales
150
Item 1-1
Item 1-1-2
10
Item 1-2
Item 1-2-1
10
Item 1-3
Item 1-3-1
70
Item 1-3-2
60
Item 1-3-3
60
Item 1-3-4
10
PP -1
RM -1
Item 1
RM -2
PP -3
NOTES: Raw materials RM-1 and RM-2 are converted to Item 1 via operation S1.
Item1 is combined with subassembly PP-1 or PP-2 to produce Item1-1, Item1-2, Item1-3 via operation S2
The above items are converted to final items Item1-1-1 … Item1-3-4
Supplier side risk: sample supply chain
Inventory related risks: controls and prevention
Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks
Sample supply chain
Price
Spend
10
500
500
5
Operation1
Operation2
Operation3
Item 1-1-1
Sales
150
Item 1-1
Item 1-1-2
10
Item 1-2
Item 1-2-1
10
Item 1-3
Item 1-3-1
70
Item 1-3-2
60
Item 1-3-3
60
Item 1-3-4
10
PP -1
RM -1
Item 1
RM -2
PP -3
Legend
A-item
B-item
C-item
On sales side ABC is assigned by sales volume, on supplier side – by spent
Supplier side risk : sample supply chain
Closer look
Sample supply chain
Price
Spend
2
500
500
5
Operation1
Operation2
Operation3
Item 1-1-1
Sales
150
Item 1-1
Item 1-1-2
10
Item 1-2
Item 1-2-1
10
Item 1-3
Item 1-3-1
70
Item 1-3-2
60
Item 1-3-3
60
Item 1-3-4
10
PP -1
RM -1
Item 1
RM -2
PP -3
Affects 95%
Of sales
Legend
A-item
B-item
C-item
Supplier side risk – PP-3 affects 95% of sales. If supplier delays/cancells/defaults on their commitment...
Ensure healthy pipeline; establish second source.
Supplier side risk: sample supply chain
Zoom in
Sample supply chain
Price
2
500
Operation1
5
Operation3
Item 1-1-1
Sales
150
Item 1-1
Item 1-1-2
10
Item 1-2
Item 1-2-1
10
Item 1-3
Item 1-3-1
70
Item 1-3-2
60
Item 1-3-3
60
Item 1-3-4
10
PP -1
RM -1
We get healthy and reliable
Profit. Supplier gets 0.1
And has to invest 1.9
500
Operation2
Item 1
RM -2
PP -3
Affects 95%
Of sales
Legend
A-item
B-item
C-item
. PP-2 costs $2. Supplier's fee is $0.01, and parts they need to buy are $1.99... Supplier may not carry enough
Inventory to support volume, which affects $20 revenue for the company.
Monitor supplier's inventory and ensure supplier has enough cash to deliver the goods.
Supplier side risk categorization
Goals
• Ensure optimal cost is contracted, executed, and monitored for opportunities
• Minimize/prevent supplier's risk – leverage multiple sources
• Consolidate to increase volume and further improve prices
• Effect of delay of materials on company's revenue and risk of loss of business
• Know limited use/C category items that feed in A-items
Identification • Review supplier's ability to fund their purchases and support volume (Expense/Revenue)
Prevent
• Build redundancy; monitor supplier’s risk exposure
• Define escalation path with supplier
• Qualify multiple sources
Source: “Cisco addresses supply chain management”
http://www.cisco.com/web/strategy/docs/manufacturing/Cisco_Case_Study_AMR_10-0917.pdf
Customer side risk : sample supply chain
Zoom in
Sample supply chain
Price
Spend
2
500
Operation1
Operation2
Operation3
Item 1-1-1
Sales
150
Item 1-1
Item 1-1-2
10
Item 1-2
Item 1-2-1
10 and for
By ONE customer
PP -1
RM -1
Item 1
Item 1x
ONE design only
Item 1-3
500
5
Our highest runner is used
Item 1-3-1
70
Item 1-3-2
60
Item 1-3-3
60
Used by one
Item 1-3-4
customer
10
RM -2
PP -3
Legend
A-item
B-item
C-item
. Item 1-1-1 : If anything happens with customer's design, our entire WIP can become obsolete.
Item 1-3-3 : If anything happens with [our relationships with ] the customer – back end wip will be obsolete
Customer side risk categorization
• Protect from E&O due to drop in demand
Goal
Identification
Prevention
• Items sold to a single customer
• And used in single design
• Establishing NRE and robust liability monitoring
• Establish contractual liabilities
• Review frequently
• Monitor amount of material in distribution channels and at contract manufacturers.
Summary
Summary : Successful risk management is:
Established practice
 Supported by reliable process
 Dedicated to direct attention to right risk areas
 Includes teams from supplier, company, and customers
 Well communicated and transparent
 Has access to senior and executive level management