July 2013 Managing supply chain risk - A HCL perspective
2 CONTENTS DISRUPTIONS BIG OR SMALL HAVE COSTLY CONSEQUENCES 2 CATEGORIES OF SUPPLY CHAIN RISKS 3 MANAGING RISK ACROSS THE SUPPLY CHAIN 4 SUPPLY CHAIN RISK MANAGEMENT (SCRM) 7 THE FOUNDATION SUPPLY CHAIN VISIBILITY 8 HOW HCL HELPS CUSTOMERS MANAGE RISK 9 THE NEED OF THE HOUR 12 REFERENCES 12 ABOUT HCL 13 DISRUPTIONS BIG OR SMALL HAVE COSTLY CONSEQUENCES In today s globally integrated and extended supply chain, even a small disruption at a remote geographical location can cause serious damage to a company s profitability, market share and at worse its reputation. For example, the 2011 earthquake in Japan and its ensuing Tsunami not just reduced Toyota s profit by 30% but also its position as the largest automaker in the world. Taiwan floods in 2011 hit manufacturers of hard drives, pushing up prices for internal and external drives and hitting PC makers like Dell and Acer. A month-long lockout at one of India s leading automobile plant resulted huge financial loss and supply disruption, resulted in increased waiting time for delivery for customers. Recent studies have revealed that small supply chain disruptions can reduce shareholder value in affected companies by 7%. As a result, managing risks and the associated responses is emerging as a critical component of Supply Chain Management.
3 CATEGORIES OF SUPPLY CHAIN RISKS Component Factory Raw Material Customers System Factory Retail Store Enterprise Suppliers Figure 1 - Categories of supply chain risk Supply chain risk includes the external threats to supply chains such as natural disasters, political instability and also systemic vulnerabilities like information fragmentation and oil dependence. Based on their source, supply chain risks fall into the following three broad categories: Environmental risks include events such as economic recession, political instability and natural disasters like hurricanes and tsunamis. Network risks are a result of the sub-optimal interaction between the organization and its supply chain partners. It has two components: Supply risks stem from problems with upstream and downstream partners. They get amplified if the organization has JIT (Just-in-Time) systems and if components are globally sourced. Demand risks are attributed to poor perception of the customer demand. They are simply the difference between the actual end-market-place demand and the orders placed with an organization by its customers. Operational risks are defined as the organization s internal inability to meet a production delivery target. They include problems like inadequate workforce, legal and regulatory compliance issues, information flow disruption due to IT-systems failures. The evolving nature of the supply chain has also transformed the risks landscape. Trends such as globalization, specialization, volume consolidation etc., all aimed towards delivering optimal customer service at the minimal cost, have made supply chains more complex and have greatly increased their vulnerabilities. Table - 1 below lists some of these trends and their potential impacts.
4 TREND Globalization Specialization Complexity Lean Processes Information availability EXAMPLE Outsourcing, offshoring Geographical concentration of production Product/network complexity Single sourcing, buffer stock reduction Track and Trace RISK IMPACT Local concentrated risks become globally diffused, involving multiple actors Efficient process can be easily disrupted by localized event Reliance on multiple parts/ players in diverse locations reduces visibility and adds latency into monitoring systems While initially efficiency is improved and costs are lowered, fewer alternatives in case of disruption Systems increasingly reliant on information flow and systems Table 1 - Risk trend and impacts Notes: Supply chain risk includes the external threats MANAGING RISK ACROSS THE SUPPLY CHAIN Demand Inventory Manufacturing Sourcing Distribution Frequent Demand fluctuation Stock out Backlog and delay Logistics congestions Delayed Shipment Trade Promotions Obsolesce Breakdowns Currency and fuel price fluctuations Partial shipment Events Competitors promotions Excess Non conformation to regulation Capacity and regulatory issue Reverse logistics New Product Introductions Product recall Batch rejection poor quality Environmental catastrophe Promotions - brandings New technology and Regulations Batch traceability Low capacity utilization Financial Crisis Regulations Tax, customs Poor Data quality Poor forecast Constraints-Bottle neck issues Poor forecast & demand visibility Poor forecast & demand visibility Causes Causal factors Forecasting algorithm Safety stock alignment Lead time variation Capacity estimation Quality issues Capacity issues Supplier selection Warehouse capacity 3PL selection Macro economic factors Shorter product & shelf life Manpower & Matrl availability Logistics modes & connectivity Network mapping & mode selection Impact Poor Forecast accuracy Loss of Inventory value Backlog & low capacity util Cost overrun Partial and delayed delivery Table 2 - Risk event across supply chain
5 Demand Risk Forecast risk results from a mismatch between the company s business plan projections and actual demand from the market. If forecast is very high, it may lead to excess inventory creating obsolesce risk and price markdowns. Forecast that is too low may lead to stock out situations due to non-availability causing loss of revenue. Forecast risk primarily results from information distortion or noise from within the supply chain. Major factors contributing to information distortion are promotions as it leads to forward buying and bulk purchasing which results in volatility of orders. Such risk of distortion further magnifies as we move away from the customer known as Bullwhip effect. Companies can adopt collaborative planning and forecasting across the supply chain to avoid this risk. Similarly, forecast risk can be mitigated by holding right inventory, responsive production and delivery capacity. Inventory Risk Inventory-related risk can be avoided by using time tested methodologies such as pooling of inventory, creation of common components across products and delayed differentiation. Pooling of inventory is effectively used by garment and retail industries to meet their demand across various size sets and colors across geographies. Computer and laptop companies leverage many common components such as hard disk, processor etc. to support wide variety of end products. Similarly, paints companies such as exploit delayed differentiation to avoid risk of excess inventory. Manufacturing Capacity Risk Capacity can also be increased and decreased based on time. Capacity building becomes the strategic decision for the organization as it is a capital intensive investment with major impact on business profitability. Low capacities can cause backlogs if there are sudden spurts in customer demand while excess capacities can lead to lower utilization. Hence, best-in-class organizations use level, chase and mixed strategies to adjust capacities based on changing business scenario. Level strategy uses a constant workforce and produces similar quantities each time period thereby using inventories and backlog orders to absorb demand peaks and valleys. Chase strategy minimizes finished goods inventories by trying to keep pace with demand and supply fluctuations and matching demand by varying either work force level or output. Hybrid strategy uses a build-up inventory ahead of rising demand and then fulfills backlog orders to level extreme peaks by subcontracting production and hiring temporary workers to cover short-term peaks.
6 Sourcing/ Procurement Risk There are various risks in procurement that may impact the delivery and acquisition costs and timelines resulting from fluctuating foreign exchanges to geopolitical disturbances, logistics congestions or regulatory clearances. Some of these may also get triggered due to financial crisis and capacity issue faced by suppliers. Various risk mitigating approaches can be explored such as multi-vendor sourcing, tying up suppliers into long term contracts, hedging to counter currency fluctuations etc. Creating a planned redundancy by sourcing from more than one supplier mitigates the risks associated with sourcing from a single supplier from a geo-politically disturbed area. It also helps to maintain alternative source or high raw material inventory to mitigate against such disturbances. Hence, an organization needs to trade-off between economies of scale and cost of risk management through redundant capacity. Similarly, price increase from suppliers can be offset by tying them into long term contracts. Supplier qualification and selection criteria need to be revised regularly based on supplier performance. Supplier evaluation criteria and their weightages vary based upon the priority across cost impact, timely delivery and quality specifications. From a risk perspective, suppliers should be evaluated on their capability to respond to demand fluctuations, design changes and expand. Best-in-class organizations favor vendor-managed inventory to reduce procurement related risks. Currency fluctuations can be hedged by exporting to multiple markets across the world. Multinational automobile companies are using export by allocation of around 10-40% of total capacity in emerging markets like India. This helps them achieve economies of scale by getting better discounts from supplier. Such risk mitigation contributes to reduced cost and improved margin in price-sensitive markets. Distribution Risk Distribution risk results from lack of visibility of demand from the market. It creates challenges in terms of selections of optimal network and mode of shipment to ensure timely delivery of product. Delivery issues further get compounded due to poor infrastructure such as lack of capacity, shipment modes and congestions at ports. Organizations can mitigate such challenges by using a combination of centralized and decentralized distribution. Decentralized strategy is adopted where product demand is stable, whereas centralized strategy is leveraged where there is uncertainty of demand. Supply can further be de-risked by aligning right safety stock based on periodic review of lead time to ensure network is responsive during any event.
7 SUPPLY CHAIN RISK MANAGEMENT (SCRM) Risk management is the process of measuring or assessing risk and then developing strategies to manage the risk. These strategies can involve the transference of risk to another party, risk avoidance or mitigation, and shared responsibility between the organization and its supply chain partners. Any risk mitigation strategy of any organization is primarily focused on reducing the supply chain vulnerabilities and improving its recovery capabilities in case of unanticipated events. To formulate such a strategy, consideration should be given towards balancing the organizational appetite for risk against risk exposure. While the risk management models in practice vary across industries, the following three elements are common for building any supply chain risk strategy: Visualize and understand risk the first steps companies struggle with are getting a handle on risk. This involves an assessment of the relevant risks to the organization for characteristics as ability to visualize, measure and mitigate. Measure the impact and likelihood once risk elements are identified, they need to be scored on the likelihood of occurrence, and the impact needs to be quantified. High-impact, high-likelihood issues need to be prioritized. Prioritize and take action finally, the portfolio of risks needs to be balanced against the risk tolerance of the organization. Firms must decide between trade-off between the risks acceptance consequences and the cost involved for risk mitigation and prevention efforts. For a robust risk management strategy there should be a judicious interplay of these three characteristics. Figure 2 - Supply chain risk management strategy
8 THE FOUNDATION SUPPLY CHAIN VISIBILITY With global sourcing and product development becoming a norm, today s supply chains have become increasingly complex and are more prone to delays and disruption. The basis for a solid supply chain risk management program includes improved knowledge of where the disruptions may occur and training to know when and how to respond. To mitigate risks, real time information gathering and sharing are required to facilitate a timely, coordinated response. This real time access to vital supply chain operations and associated performance indicators is known as supply chain visibility. The level of awareness of the potential for disruptions and the capability to respond are the greatest preventive actions that organizations can take to prevent the effects of a major disruption impacting their global operations. Supply chain visibility is enabled by technology and facilitated through continuous communication among supply chain partners. Such a combination helps in establishing a greater understanding of the factors affecting the supply chain and the risks posed by them. Information technology provides the crucial platform for such visibility. Through a real time node-by-node collection and analysis of internal and external supply chain data, visibility information system arms the supply chain manager with vital actionable information like location-based inventory, demand levels and their lead times for efficient balancing of supply chain risk against cost. It also helps in identifying key metrics and effectively monitoring the supply chain performance. Another dimension of supply chain visibility is benchmarking. Benchmarking involves continuously measuring processes and practices against the competitors or those who are recognized as leaders of the industry with the focus on identifying areas of improvement. In order to create effective benchmarks, organizations always need to know how they are performing in different functional areas, with real time visibility by identifying and monitoring well-defined KPIs. But implementing a stable and scalable visibility solution is not easy. Supply chain organizations are almost always under intense budget constraints which necessitates the need for lean, scalable solutions that can seamlessly integrate with the existing systems and can be further tailored as per the organization and business needs. Disparate technologies and protocols across system further compound the problems of collecting and normalizing information sets and converting them into actionable intelligence. HCL has identified the major challenges in this area and has come out with specific solutions for the same.
9 HOW HCL HELPS CUSTOMERS MANAGE RISK HCL s risk management proposition leverages both proactive and reactive measures to manage risk across the supply chain. It is tailor-made to an organization s supply chain needs through consultative approach and implemented seamlessly into business operations through information technology. 1 Identification Process Driven Brain storming iew 2 3 Classification Measurement Cause Effect Fish bone diagram Mind Mapping Check sheets Flow charts eriodic Revi 4 Analysis Failure mode effect Analysis Control charts Pareto Analysis P 5 Control Risk Ranking and Filtering What if scenarios 6 Implementation Project Management 7 Monitoring SCOR DSI-Touchstone ISCM Figure 3 - Risk Management Approach Risk Identification HCL follows a process-driven approach to identify risks across the supply chain. It is initiated through detailed structured workshops with respective functional teams. These discussions help in the identification of supply chain risks, which may adversely impact business operations. They capture the experience of functional managers in facing and managing such risks. Such brain storming sessions assist in identifying various risks, their true nature, occurrence and related impact across functions. Risk Classification Risks are further classified based on their origin, frequency and impact. Mind mapping and root cause analysis establish relationship and dependencies across various supply chain risks. The first step begins with external or internal risk classification based on origin. Risks are then further sub-classified by supply chain functions i.e. planning, sourcing, manufacturing and delivery.
10 Probability of Occurrence Frequent Probable Occasional Rare Very Low Risk Low Risk Medium Risk High Risk Negligible Minor Major Severe Severity Figure 4 - Risk Management Approach Risk Measurement After identification and classification of risks, a combination of qualitative and quantitative approaches is adopted to measure risk. Risk measurement across supply chain consists of mapping key performance indicators (KPI) impacted due to these risks. The following table shows sample KPIs used to measure risks across the supply chain. However, sometimes due to lack of quantitative data it s prudent to use qualitative data to measure impact. Demand Inventory Manufacturing Sourcing Distribution Forecast Error, Mean absolute percentage error Inventory turns, Excess Inventory, Inventory expiry, aging, stock out rates Backlog, rejections, Downtime, Capacity utilization (OEE), production adherence Order deviation, raw material impact price, rejections, Perfect order fulfillment, Fill rates, Partial and delayed delivery Table 3 - Risk impact supply chain Risk Control Risk management is tailored across the supply chain based on the cost of risk mitigation and overall impact on business. It s a tradeoff that business managers need to decide, keeping both business objective and cost of failure in balance. Industry-specific benchmark data for monitoring performances are leveraged to monitor deviation and ensure timely action to mitigate risk.
11 Implementation and Monitoring Successful supply chain risk management primarily depends upon seamlessly incorporating a structured risk management approach with business goal and integrating SCRM solutions into the supply chain operations of an organization. HCL s process-driven consultative approach consisting of DSIOP (Discover and Study, Identify Opportunities and Prioritize) helps in analyzing supply chain risks, identifying gaps with respect to best practices and defining business aligned solutions to mitigate them. Risk mitigation analyses are performed through What-if scenario modeling. As discussed earlier, visibility and collaboration across the extended enterprise environment are essential in enhancing supply chain agility and thereby mitigating the impact of supply chain risk events. CHALLENGES Identifying risk- a key challenge is to map right risk across supply chain impacting business performance and goal. Focusing on right set of risk ensures, organization will not be exposed to any major disturbances and by being proactively prepared to mitigate it Measure Risk-Any thing which cannot be measured its difficult to bring improvement. Hence a key challenge is to select right measurement criteria for effective tracking of impact and mitigation effort. Control risk-managing and controlling risk in day-to-day operations requires risk mitigation being part of the business process, so that any deviations are tracked and proactively controlled. Monitor Risk Even the best implemented solution by fail, it is not periodically not revisited. This requires continuous monitoring and regular review. Figure 5 - Risk Management Challanges Risk management approach enables supply chain to be more effective in responding to risky events. It offers an opportunity to the organization to get an insight into its business operation and map risk impacting their performance. Its bottom up approach ensures that the organization is more integrated in its response to risk. The organization can prioritize risk and align resources where it impacts most.it is used as an input for planning business activities and measuring performance, so that any deviation can be easily tracked and addressed. It streamlines and integrates the organization with extended supply chain partner s 3rd party logistics and suppliers. It provides guidelines and a risk framework for organization to achieve a higher level of maturity with experience over a period of time.
12 THE NEED OF THE HOUR Risk mitigation through supply chain visibility While supply chain risks will continue to evolve, risk mitigation through supply chain visibility will remain a significant aspect of any supply chain risk management strategy. With increasing pressures to reduce supply chain costs and at the same time maintain effective resilience in the system, a lean and robust risk management that not only balances these ambition s but can provide a competitive edge is an elusive goal that every supply chain manager dreams of. HCL s model of engagement providing integrated supply chain visibility along with best-in-class performance benchmarking transforms this elusive goal into an achievable reality. REFERENCES 1. Supply chain risk management: Building a resilient global supply chain - Aberdeen Group - July 2008 2. Managing risk to avoid supply chain breakdown Sunil Chopra/ Manmohan Sodhi MIT Sloan Review Fall 2004 3. Perspectives in supply chain risk management Christopher S Tang International Journal of Production Economics 2006 ABOUT THE AUTHOR Roopesh is part of the manufacturing solutions team at HCL technologies ltd. He has over 9 years of experience covering management consulting, supply chain transformation and project management. He has worked across automobile, CPG, Retail-Apparel, Pharmaceutical, Money changing, Mining and publishing industry. Roopesh holds a master s degree from SCMHRD, Pune and a bachelor s degree in mechanical engineering from KLE college of engg and technology, Belgaum. He is CPIM, CSCP certified supply chain professional from APICS, Certified project management professional from PMP and Six Sigma Black belt certified from RBQSA. He can be contacted at roopesh.s@hcl.com.
13 Alok Joshi is part of the manufacturing solutions team at HCL technologies ltd. He has over 7 years of experience spanning business process consulting, business analysis and implementation in Supply Chain solutions & transformation led assignments. Alok holds a master s degree from IIM Indore and a bachelor s degree in mechanical engineering from Birla Institute of Technology, Mesra, Ranchi. He can be contacted at alok.joshi@hcl.com Shwetank is part of the manufacturing solutions team at HCL Technologies Ltd. He has over four years of experience across manufacturing, telecom industry. He is currently working in the area of supply chain performance measurement and benchmarking. Shwetank holds a master s degree in management from Department of Management Studies, IIT Delhi and a bachelor s degree in Electronics & Communication from NSIT, Delhi University. He is certified supply chain professional (CSCP) from APICS, USA. He can be contacted at shwetank.k@hcl.com. Arindam Sen is part of the Manufacturing Solution team at HCL Technologies Ltd. Arindam s primary role in HCL is to devise solutions, IPs & frameworks to address business problems of customers in HiTech vertical. Arindam is a seasoned professional with 18 years of global experience of which the last 14 years were in Information Technology and his initial 4 years were in Production Operations and Supply Chain Management. He has extensive experience in ERP consulting including Business Strategy & Planning, Product Selection, Solution Building, Competency Development and Program Management. Arindam holds a Master in Management (General Management) from Asian Institute of Management (AIM), Manila. He is also a CSCP (Certified Supply Chain Professional) from APICS, USA. He completed his Master of Engineering (Production Management) from Jadavpur University, Calcutta, India and Bachelor of Engineering (Mechanical) from IIEST, Shibpur, India.
14 ABOUT HCL ABOUT HCL TECHNOLOGIES HCL Technologies is a leading global IT services company, working with clients in the areas that impact and redefine the core of their businesses. Since its inception into the global landscape after its IPO in 1999, HCL focuses on transformational outsourcing, underlined by innovation and value creation, and offers integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and BPO. HCL leverages its extensive global offshore infrastructure and network of offices in 31 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare. HCL takes pride in its philosophy of Employees First, Customers Second which empowers our 84,403 transformers to create a real value for the customers. HCL Technologies, along with its subsidiaries, had consolidated revenues of US$ 4.5 billion (Rs 24,709 crores), as on 31st March 2013 (on LTM basis). For more information, please visit www.hcltech.com ABOUT HCL ENTERPRISE HCL is a $6.2 billion leading global technology and IT enterprise comprising two companies listed in India HCL Technologies and HCL Infosystems. Founded in 1976, HCL is one of India s original IT garage start-ups. A pioneer of modern computing, HCL is a global transformational enterprise today. Its range of offerings includes product engineering, custom & package applications, BPO, IT infrastructure services, IT hardware, systems integration, and distribution of information and communications technology (ICT) products across a wide range of focused industry verticals. The HCL team consists of over 90,000 professionals of diverse nationalities, who operate from 31 countries including over 500 points of presence in India. HCL has partnerships with several leading global 1000 firms, including leading IT and technology firms. For more information, please visit www.hcl.com