How Supply Chain helps mitigate business risk
Filed Under Blog
All organizations face risks, they can come in various shapes and sizes and can impact the business in a variety of ways with various degrees of severity. Against these risks, most businesses will employ some method of risk control to devise mitigation activity, where required, and appoint owners whose roles it will be to co-ordinate the risk reduction activity.
Supply Chain can both be a key contributor and mitigator for business risk. Supply Chain will typically control the flow of materials both into and within an organization. Where severe problems occur an organization can be quickly bought to its knees.
Consider the impact of a supplier going bankrupt and unable to supply goods – those goods might be crucial to the assembly of a particular product with the result a stop in production, while an alternative supplier is sourced. This could result in an unhappy customer, potential lost sales and serious financial impact.
Common Business Risks
There are thousands of risks that a business could face. However supply chain risks tend to fall into a number of categories.
Risk of Interruption of manufacture/production
The supply chain community can do much to support the business in mitigating this risk. Continuity of supply is perhaps the key benefit to an efficient and targeted supply chain team.
Commercial Risk
Inadequate contracts with suppliers can leave organizations exposed – this is especially true where contract terms from customers are not flowed down within supplier contracts. In the event of customer commercial terms being envoked this can leave organizations with heavy penalties without recourse onto it’s supply partners.
Business Continuity
Business disruption, loss of facilities or key machinery can cause significant disruption – while supply chain is not typically the owner of business continuity planning it does provide important information for key suppliers to be used and key equipment that may need replacing in the occurrence of an event.
Risk of cost escalation
Significant cost escalation can affect competiveness and bottom line financials. Managing costs is a very common supply chain task with supply chain departments (in particular procurement) getting closely involved in cost reduction programs.
Types of supply chain risk mitigation
As with any risk management process – mitigation is a key step – there are various fundamental supply chain functions that have a by-product of risk avoidance.
• Stock Management
• Sourcing arrangements
• Supplier relationship management
• Obsolescence Management
• Supplier rationalization programs
• Contingency planning
Where an organization has a large volume of inventory – carrying out regular checks to ensure that the correct stock is available can become problematic and time consuming.
Cycle counting is a popular tool that can be used to aide the process, putting in a structured system to prove the accuracy of stock information. Strictly speaking, cycle counting is a sampling technique where certain parts of the inventory are reviewed and the results used to imply the robustness of the inventory as a whole.
The typical process is that the ERP system will generate a list of inventory locations to audit, these will be inspected and findings entered back into the ERP system. For example – The ERP system may say to check stock Location A1001 which should have 987 of part ABC123 – the location is inspected and it’s found that 980 parts are present – this information is relayed back to the materials controller who will make the necessary amendments (-7) in the ERP.
Cycle counting using random samples
Perhaps the most common implementation of cycle counting is that of utilizing a random sample.
This means that at each check a random location is selected (typically by the ERP system) the locations are then checked and the results fed back in. This routing happens periodically (in many organizations this is done daily with a set percentage target of inventory to be verified over a given period).
An alternative approach is to conduct several random sample checks to achieve a level of comfort over the findings and then conduct the cycle count on a particular product or range of stores locations using those results as the indicator for the larger warehouse. This method works well where the warehouse is full of comparable products but less so where there is product diversity.
ABC driven cycle count process
ABC Analysis is a method that is often used to segment inventory. Where the organization has an inventory that is diverse in product type and cost – traditional cycle count processes are not appropriate as they do not account for values.
ABC typically segments inventory by cost with the most expensive items being categorized as ‘A’ items and so on.
Before undertaking a ABC driven cycle count process an ABC analysis will need to be carried out (in many ERP systems the results can be stored within the database to help drive cycle count processes.) The structure of the cycle count is that the ‘A’ Class items will be checked / counted more frequently than the ‘B’ items which in turn will be counted more than the ‘C’ class items.
Problems with cycle count processes
Cycle count processes are not without their issues.
• The process can be particularly resource hungry for organizations with large warehouses/inventories
• Administration involved in producing check sheets where it cant be automated
• The inventory accuracy of items not counted may be low and counted items may not be representative of the overall inventory
• Write on / Write Off processes and financial authorisation to change stock figures need to be robust