Description
the tradeoffs between the increase in costs and hedging the risks explained with the help of adopting various strategies.
The benefits of Participative Disruption Management i.e. System-wide Disruption Awareness/Capabilities by having real-time supply chain intelligence gathering, information sharing, and coordinated response
Supply chain disruptions can arise from many sources — and oftentimes without warning. These disruptions can be entirely external, such as a
natural disaster,
or they can be
internal, rising from the failure to integrate all functions in a supply chain. Disruptions also can result from attempts to create a more efficient, cost-conscious supply chain environment. There are four common types of information sharing strategies for a supply chain of a single product: • • • • Order information sharing where every stage of the supply chain only knows the orders from its immediate downstream stage Demand information sharing where every stage has full information about consumer demand Inventory information sharing where each stage shares its inventory levels and demand information with its immediate upstream stage Shipment information sharing where every stage shares its shipment data with its immediate upstream stage. A supply chain must be fully integrated to operate at maximum efficiency. Failing to understand the potential vulnerabilities can compromise the supply chain's ability to handle unexpected and sudden shocks. By understanding risk within and external to the supply chain, an organization can more clearly identify its options for optimizing the supply chain to ensure viability and strength. Whatever their cause, supply chain disruptions can have an enormous ripple effect. The results of supply chain disruptions can be financial, political, economic, and social. But
the ability to more effectively manage the supply chain by understanding the potential impact of such disruptions can create a strategic advantage in a competitive marketplace. The following are some of the most important benefits of real time information access with respect to disruptions;
?
It would help to fully understand the dependencies within the supply chain. Every node in the supply chain is dependent on the previous or next node to get accurate information and produce or procure accordingly. Wrong or out dated data would lead to stock outs or excess inventory. Identify the weak links within the supply chain is also possible. The nodes which are most susceptible in case of a natural disaster or suffering from excess cost cutting will lead to inefficiencies in the supply chain. Understanding the risk that has been inadvertently built into the supply chain will be possible only when information is available real time. It will also help in identifying the supply chain risks that we might can to mitigated, eliminated, or pass on to another supply chain member. This will also enable the top management to incorporate the element of risk when making strategic or tactical decisions about our supply chain. This can be realized in terms of building better facilities, increasing production facilities or storing inventory. This also ensures that enterprise-wide risk profile has been captured. Knowledge whether supply chain is nimble and flexible in order to take advantage of both supply chain risks and opportunities. The flexible supply chain will help ensure protection against sudden demand or sudden disruptions to the supply chain. The availability of real time information will help identify which supply chain risks may cause an adverse event that could cause a significant disruption to our supply chain. This will ensure co-operation between the different stages of the supply chain. The potential risk to any stage of the supply chain will ensure that the preceding or succeeding stage takes necessary precautions.
?
?
?
?
?
?
It will help understand whether the necessary tools, skills, and resources to model our supply chain, including its risks and vulnerabilities are available or not. It will also help understand the financial impact that various events and scenarios will have on the supply chain. Benchmarking the activities that make up the supply chain is also possible only with information sharing across the stake holders. This collaborative planning will help ensure that we are aware of the performance standards that will ensure that risks are mitigated. It will also help identify and monitor the key risk indicators of upstream or downstream activities that might result in a disruption in the supply chain
?
Trade offs between increase in cost and hedging of risk by adopting such strategies
There are various risk hedging strategies used especially during network design and day to day supply chain practices. The cost implications of such initiatives can be controlled in the following manner. 1. Increased capacity: By increasing production capacity, the risk of running out of stock and unfulfilled orders is mitigated. However, this would lead to high expenditure in procuring new machines, more manpower and more resources which will be required to increase the production capacity. This can be countered by focusing on low costs and decentralized capacity for predictable demand. Capacity must be centralized for unpredictable demand. Even though the increased capacity would hurt the costs front, this can be balanced by increased sales when the organization has the capacity to produce goods in case of unpredicatable demand. 2. Increase responsiveness: The trade off between a responsive and efficient supply chain is a hugely debated issue and plays a great role in network design. With the increase in number of facilities, the response time decreases and it is possible to get products to the market very soon. This however would increase costs in the
form of transportation costs, facilities and handling costs etc. This increase in costs can be adjusted in case of products which have a short PLC or which are new to the market and need to reach the consumers very fast. If this cost is not incurred, then the product might not reach the end consumer in time resulting is lost sales. 3. Insurance strategies: Getting the stock or goods insured is a major factor which is used in risk hedging. The costs of paying the premium seem to be a burden a number of times and organizations stop paying that premium. However, in a cost benefit analysis, the benefits are always higher because of the value of the goods that are insured and the fact that the premium paid is just a small fraction of that. 4. Increased inventory: keeping increased inventory is also a means used to ensure protection against risk of stock outs. Such a strategy is beneficial in case of products which have low inventory costs. Incase of products where the inventory costs are very high, increased stocks will be harmful for the organization. 5. International business: the long international supply chains and interdependence among economies and businesses that globalization has created is an obvious target. The threat of an oil tanker hijacked by terrorists or a dirty bomb smuggled in to attack a vital supply chain facility has invariably been highlighted as possible nightmare scenarios by security agencies. Apart from the damage to the physical assets, the ensuing disruption and economic loss are enormous. In such a scenario, the costs of risk hedging strategies like information sharing and insurance is nothing compared to the high costs of loses due to terrorist attacks. 6. IT support infrastructure: Modern supply chains require constant vigilance as well a surveillance system in place to prevent such terrorist acts targeting the global trading and supply chains. The key concern is the costs to modernize physical infrastructure, acquire modern technology and equipment and train personnel. However, if such costs are not incurred, the Cost of being left out of the global supply chains is even higher. Moreover, FDI and trade may be diverted to other countries with security measures which are not available in a certain country. Being left out from the process would mean loss of export competitiveness if not
loss of trade itself. There is therefore urgency in establishing national preventive security programs as well as trade recovery programs 7. Importance of value: In addition to lower risk and higher security, investments in supply chain security can provide significant business value to organizations by helping them to improve international operations, strengthen relationship with their customers and increase their profitability. In other words, security investments should not be considered as a financial burden. On the contrary, they would give participating firms a competitive advantage over others that do not. Firms need to find ways to implement security- relevant practices and procedures that also create value, be that value in the form of labour savings, such as when certain automated technologies replace manual processes, or enhanced brand recognition, such as through championing the adoption of new end-to-end value chain security practices. The bottom line is that in business security matters and it should be managed to create value One impact of risk mitigation is that many companies will need to redo or at least tweak their networks designs more often. This may result in spiraling costs. An increasing number of companies are recognizing the need to replan their networks more frequently, and adjust the strategy on at least an annual basis. The network is very sensitive to changes in business strategy and the operating environment. When the constant changes in business strategy is combined with all the uncertainties in the supply chain right now, including the cost and dynamics of transportation, very few networks are good for more than about 12 months. The following observations can add value to the need for secure supply chains and risk mitigations:
•
More and more companies can move to hedging transportation costs through the proxy of hedging oil prices. This enables one to could lock in a known cost of transportation, and know for a period of time that the network assumptions and hence the network itself would be good.
•
Organizations can also look at having to fire some customers, or at least raise their prices to maintain margins. If transportation and risk mitigation costs
continue to go up and if this can’t be passed along fully, those customers may have to be pared, or a different level of service may be offered.
•
Postponement strategies are likely to continue to gain momentum. If the number of manufacturing SKUs that need to be forecast, produced, and replenished to stocking points can be reduced, it can significantly reduce the cost of transportation, in addition to other benefits. As demand and supply variability decrease with fewer SKUs to manage at the back end, companies may be more comfortable using slower, less certain, but less expensive transportation modes such as rail and intermodal to move goods to the network.
•
The trade-offs between inventory and transportation will of course continue to migrate. Until recently, with low transportation costs, the focus was more on inventory reduction. Now, companies will have to rethink that equation, or plan for how to adjust that balance if transport costs continue to soar.
doc_219812072.doc
the tradeoffs between the increase in costs and hedging the risks explained with the help of adopting various strategies.
The benefits of Participative Disruption Management i.e. System-wide Disruption Awareness/Capabilities by having real-time supply chain intelligence gathering, information sharing, and coordinated response
Supply chain disruptions can arise from many sources — and oftentimes without warning. These disruptions can be entirely external, such as a
natural disaster,
or they can be
internal, rising from the failure to integrate all functions in a supply chain. Disruptions also can result from attempts to create a more efficient, cost-conscious supply chain environment. There are four common types of information sharing strategies for a supply chain of a single product: • • • • Order information sharing where every stage of the supply chain only knows the orders from its immediate downstream stage Demand information sharing where every stage has full information about consumer demand Inventory information sharing where each stage shares its inventory levels and demand information with its immediate upstream stage Shipment information sharing where every stage shares its shipment data with its immediate upstream stage. A supply chain must be fully integrated to operate at maximum efficiency. Failing to understand the potential vulnerabilities can compromise the supply chain's ability to handle unexpected and sudden shocks. By understanding risk within and external to the supply chain, an organization can more clearly identify its options for optimizing the supply chain to ensure viability and strength. Whatever their cause, supply chain disruptions can have an enormous ripple effect. The results of supply chain disruptions can be financial, political, economic, and social. But
the ability to more effectively manage the supply chain by understanding the potential impact of such disruptions can create a strategic advantage in a competitive marketplace. The following are some of the most important benefits of real time information access with respect to disruptions;
?
It would help to fully understand the dependencies within the supply chain. Every node in the supply chain is dependent on the previous or next node to get accurate information and produce or procure accordingly. Wrong or out dated data would lead to stock outs or excess inventory. Identify the weak links within the supply chain is also possible. The nodes which are most susceptible in case of a natural disaster or suffering from excess cost cutting will lead to inefficiencies in the supply chain. Understanding the risk that has been inadvertently built into the supply chain will be possible only when information is available real time. It will also help in identifying the supply chain risks that we might can to mitigated, eliminated, or pass on to another supply chain member. This will also enable the top management to incorporate the element of risk when making strategic or tactical decisions about our supply chain. This can be realized in terms of building better facilities, increasing production facilities or storing inventory. This also ensures that enterprise-wide risk profile has been captured. Knowledge whether supply chain is nimble and flexible in order to take advantage of both supply chain risks and opportunities. The flexible supply chain will help ensure protection against sudden demand or sudden disruptions to the supply chain. The availability of real time information will help identify which supply chain risks may cause an adverse event that could cause a significant disruption to our supply chain. This will ensure co-operation between the different stages of the supply chain. The potential risk to any stage of the supply chain will ensure that the preceding or succeeding stage takes necessary precautions.
?
?
?
?
?
?
It will help understand whether the necessary tools, skills, and resources to model our supply chain, including its risks and vulnerabilities are available or not. It will also help understand the financial impact that various events and scenarios will have on the supply chain. Benchmarking the activities that make up the supply chain is also possible only with information sharing across the stake holders. This collaborative planning will help ensure that we are aware of the performance standards that will ensure that risks are mitigated. It will also help identify and monitor the key risk indicators of upstream or downstream activities that might result in a disruption in the supply chain
?
Trade offs between increase in cost and hedging of risk by adopting such strategies
There are various risk hedging strategies used especially during network design and day to day supply chain practices. The cost implications of such initiatives can be controlled in the following manner. 1. Increased capacity: By increasing production capacity, the risk of running out of stock and unfulfilled orders is mitigated. However, this would lead to high expenditure in procuring new machines, more manpower and more resources which will be required to increase the production capacity. This can be countered by focusing on low costs and decentralized capacity for predictable demand. Capacity must be centralized for unpredictable demand. Even though the increased capacity would hurt the costs front, this can be balanced by increased sales when the organization has the capacity to produce goods in case of unpredicatable demand. 2. Increase responsiveness: The trade off between a responsive and efficient supply chain is a hugely debated issue and plays a great role in network design. With the increase in number of facilities, the response time decreases and it is possible to get products to the market very soon. This however would increase costs in the
form of transportation costs, facilities and handling costs etc. This increase in costs can be adjusted in case of products which have a short PLC or which are new to the market and need to reach the consumers very fast. If this cost is not incurred, then the product might not reach the end consumer in time resulting is lost sales. 3. Insurance strategies: Getting the stock or goods insured is a major factor which is used in risk hedging. The costs of paying the premium seem to be a burden a number of times and organizations stop paying that premium. However, in a cost benefit analysis, the benefits are always higher because of the value of the goods that are insured and the fact that the premium paid is just a small fraction of that. 4. Increased inventory: keeping increased inventory is also a means used to ensure protection against risk of stock outs. Such a strategy is beneficial in case of products which have low inventory costs. Incase of products where the inventory costs are very high, increased stocks will be harmful for the organization. 5. International business: the long international supply chains and interdependence among economies and businesses that globalization has created is an obvious target. The threat of an oil tanker hijacked by terrorists or a dirty bomb smuggled in to attack a vital supply chain facility has invariably been highlighted as possible nightmare scenarios by security agencies. Apart from the damage to the physical assets, the ensuing disruption and economic loss are enormous. In such a scenario, the costs of risk hedging strategies like information sharing and insurance is nothing compared to the high costs of loses due to terrorist attacks. 6. IT support infrastructure: Modern supply chains require constant vigilance as well a surveillance system in place to prevent such terrorist acts targeting the global trading and supply chains. The key concern is the costs to modernize physical infrastructure, acquire modern technology and equipment and train personnel. However, if such costs are not incurred, the Cost of being left out of the global supply chains is even higher. Moreover, FDI and trade may be diverted to other countries with security measures which are not available in a certain country. Being left out from the process would mean loss of export competitiveness if not
loss of trade itself. There is therefore urgency in establishing national preventive security programs as well as trade recovery programs 7. Importance of value: In addition to lower risk and higher security, investments in supply chain security can provide significant business value to organizations by helping them to improve international operations, strengthen relationship with their customers and increase their profitability. In other words, security investments should not be considered as a financial burden. On the contrary, they would give participating firms a competitive advantage over others that do not. Firms need to find ways to implement security- relevant practices and procedures that also create value, be that value in the form of labour savings, such as when certain automated technologies replace manual processes, or enhanced brand recognition, such as through championing the adoption of new end-to-end value chain security practices. The bottom line is that in business security matters and it should be managed to create value One impact of risk mitigation is that many companies will need to redo or at least tweak their networks designs more often. This may result in spiraling costs. An increasing number of companies are recognizing the need to replan their networks more frequently, and adjust the strategy on at least an annual basis. The network is very sensitive to changes in business strategy and the operating environment. When the constant changes in business strategy is combined with all the uncertainties in the supply chain right now, including the cost and dynamics of transportation, very few networks are good for more than about 12 months. The following observations can add value to the need for secure supply chains and risk mitigations:
•
More and more companies can move to hedging transportation costs through the proxy of hedging oil prices. This enables one to could lock in a known cost of transportation, and know for a period of time that the network assumptions and hence the network itself would be good.
•
Organizations can also look at having to fire some customers, or at least raise their prices to maintain margins. If transportation and risk mitigation costs
continue to go up and if this can’t be passed along fully, those customers may have to be pared, or a different level of service may be offered.
•
Postponement strategies are likely to continue to gain momentum. If the number of manufacturing SKUs that need to be forecast, produced, and replenished to stocking points can be reduced, it can significantly reduce the cost of transportation, in addition to other benefits. As demand and supply variability decrease with fewer SKUs to manage at the back end, companies may be more comfortable using slower, less certain, but less expensive transportation modes such as rail and intermodal to move goods to the network.
•
The trade-offs between inventory and transportation will of course continue to migrate. Until recently, with low transportation costs, the focus was more on inventory reduction. Now, companies will have to rethink that equation, or plan for how to adjust that balance if transport costs continue to soar.
doc_219812072.doc