Risk Analysis Will Drive Better Decisions Across the Supply Chain
Written by Randy Heffernan, Palisade Corporation
The lack of extensive risk analysis performed in the supply chain will continue to be detrimental to efficiency. As supply chains expand globally, their risk of disruption also grows. Catastrophic events, such as the Japanese earthquake and Hurricane Katrina, have highlighted the need for analysis of disruption risk and development of mitigation plans to cope with that risk.
Trends such as globalisation, heavy reliance on transportation and communication infrastructures, and lean manufacturing have led to an increase in the vulnerability of supply networks. Points on the supply chain are interrelated, causing these vulnerabilities to propagate rapidly.
More and more organisations around the world, however, are turning their eyes away from decision-making processes based on single point estimates and viewing their risks and opportunities with more sophisticated techniques.
One such technique, Monte Carlo simulation (MCS), allows the examination of all the possible outcomes of decisions and assesses the impact of risk, allowing for better decision making under uncertainty. It is a computerised mathematical technique that allows the business modeler to account for risk in quantitative analysis and decision making. MCS furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur for any choice of action.
Managers need to be able to answer questions like: “What is the probability this critical part will arrive on time?” and “What are the chances of failure at this point in the process?” This approach allows decision makers to perform trade-off analysis among expected costs, quality acceptance levels, and on-time delivery distributions. It also provides alternative tools to evaluate and improve supplier selection decisions in an uncertain supply chain environment.
Risk analysis utilising Monte Carlo Simulation assists organisations that rely heavily on supply chain efficiency to forecast any number of potential obstacles that could cause a disruption in continuity. Additionally, knowledge of the probability that those risks may occur further empowers decision-makers to formulate contingency plans, meet customer demand on time, and ultimately increase bottom line profitability.
Randy Heffernan is Vice President of Palisade Corporation, a global software developer that produces decision support tools for professionals in many lines of work. The company was founded in 1984, and at present more than 400,000 people use Palisade’s software in fields that range from finance to oil and mineral exploration, real estate to heavy manufacturing, and pharmaceuticals to aerospace. Its software is used by many Fortune 500 companies, including Shell Oil, Procter & Gamble, ExxonMobil, Chase Manhattan, and by prominent economic and financial consultants.