Risk is nothing new to the average supply chain. Supply chain managers think about it, talk about it, and hopefully plan for it. Industry changes, though, are increasing the complexity of the risk management picture. It's time to face it head on, according to at least one industry leading company.
“Complexity is something that you can't run away from. You have to figure out how to manage it,” said Mudit Bajaj, senior director of logistics for Jabil, at the recent Eighth North American Hi-tech and Electronics Supply Chain Summit held in Burlingame, Calif. The supply chain management and electronic manufacturing company has a 170,000 parts supply chain, and is working toward this type of proactive risk management.
A first step is understanding what risk is at the broadest levels. “Risk is anything that has the potential to obstructing the flow and transformation of material resulting in compromised of required service level or cost,” said Bajaj. “We need to recognize that this is the definition we need to remember.”
Organizations, either deliberately or unknowingly, inject risk into the supply chains as they decide where and how to manufacture, source, and move products around. “It's important to look at all aspects of manufacturing and consider what risk you introducing,” said Bajaj. He points to APIC’s Supply Chain Operations Reference (SCOR) model as a way to look across the supply chain with an eye toward risk, considering reliability, responsiveness, agility, cost, and assets.
Organizations need to consider risk from a variety of angles, including the sourcing, making, delivery, and return of products.
On the sourcing side, the list of considerations is long and familiar to the average OEM or contract manufacturer. Important things to consider include currency, fuel, inflation, and macroeconomic indicators for manufacturing and distribution. Further, in considering potential suppliers, organizations should factor in elements that include location, lead-time, part quality, supplier financials, and sole sourcing. “Anything that has the potential to give a surprise and stop shipping is a risk,” Bajaj added.
Too often, organizations spend too much time focusing on the biggest suppliers. “The majority of supply chain risk is not in the top spend suppliers,” said Bajaj. “There's a huge tail to the right where spend is minimal but you have the largest number of suppliers.”
Further organizations should consider the potential revenue of the product, rather than the cost of a component. “”For a two dollar part to stop a shipment is huge,” said Bajaj. “People need to start looking at a revenue impact rather than a spend perspective.” With this large group of suppliers, careful planning and regular audits are critical to mitigate risk. Good quality data about suppliers that is timely and fresh makes a big difference when trying to reduce risk.
In the product development cycle, it's never too early to start thinking about risk. “The best place to mitigate risk is at the design stage,” said Bajaj. “We get so engaged in getting a product designed that we ignore the risk.” Unfortunately, cleaning up problems introduced at the earliest stages of design can be difficult, costly, and time consuming.
When evaluating risk in manufacturing, organizations also need to carefully manage capacity. “Too much capacity impacts overhead, while too little results in opportunity cost,” said Bajaj. “Right sizing is important — and it's important to have that discussion along with other strategic discussions.” Organizations should also need to factor in demand forecasting (to get the right inventory to the right place at the right time), as well as machine uptime and trade compliance.
Trade compliance considerations must also be considered when evaluating delivery risk. Other factors include shipment time, security challenges, transport methodologies, and more.
Jabil relies heavily on a variety of tools that include people, procedures, and technology. “Risk mitigation needs to be part of everybody's job,” said Bajaj. “In the last three or four years, many companies have set up risk departments, and that's good because we need change agents, but without support throughout the whole organization it won't do a lot.”
Let us know how your organization measures and manages risks. What lessons have you learned?
— Hailey Lynne McKeefry, Editor in Chief, EBN