SAPICS: manage supply chain risk as a core competency
Report by SAPICS
The average disruption in company supply chains can erase around 30% of shareholder value. However, by learning how to manage a company’s various supply chains according to the business objectives they aim to achieve, this risk can be managed very effectively.
“Supply chain risk is a growing concern at an executive level,” said supply chain thought leader Douglas Kent, former Vice President of Avnet Velocity and speaker at the recent regional conference of SAPICS – an industry body for supply chain management professionals.
“The more global and integrated we’re becoming," he added, "with increasing dependence on suppliers and other factors we can’t control, we’re becoming more vulnerable to risk.”
According to Kent, many companies risk serious disruption, reputational damage or financial ruin because they have so little visibility over their extended supply chains.
Identifying risk through increased supply chain visibility is therefore critical in managing risk.
Kent said: “Risks need to be identified in terms of suppliers, customers and internal risks; and then assessed and quantified in order best to determine how to manage them.”
When it comes to identifying risk, the first question that needs to be asked is how many supply chains a company has.
“Different supply chains operate according to different business objectives. Therefore, they need to be handled differently,” said Kent.
Using IT to track indicators, such as suppliers’ lead times, enables one to run analytics that will help one understand what is happening in a supply chain over time – and therefore identify potential risks. To this end, the world’s largest companies run expensive cloud-based ‘control towers’ that enable them to gather and analyse enormous amounts of data.
“But, even smaller companies should be gathering and analysing data to the best of their ability," said Kent.
In order to decide which risks one can afford to mitigate, it is necessary to calculate VAR, which is the sum of the probability of risk events, multiplied by the monetary impact of the events for all supply chain functions.
“By expressing the likelihood of each risk taking place in an annual percentage – the chance the event will occur in a given year - and considering the financial impact, VAR helps answer questions like whether the risk of outsourcing supply to a foreign country is worth the saving.”
With the risks quantified, it’s time to determine whether each supply chain needs to perform at a superior level, with an advantage to competitors, or on a similar par to them.
“Next, you need to decide what the competitive requirements for each supply chain will be and to what degree you’re going to pursue performance attributes: reliability, responsiveness, agility, cost, assets. For example, if you’re pursuing 98% order fulfillment (reliability), then you’ll have much inventory. But if you’re competing on cost, you can’t do that,” says Kent.
It’s up to the executive team to determine what the competitive requirements are. “Once you have this direction, you can work towards it. Then you can figure out your game plan.”
Armed with this understanding, one can then determine your risk tolerance within a supply chain. “For example, if you’re focused on reliability, then the supply chain has a low tolerance for risk that affects reliability. Therefore, risk mitigation in this case might mean obtaining more inventory. One’s approach all hinges on the business objective.”
According to Kent, it’s important to note that increasing cost, for example in the case of enlarging inventory, is regarded as acceptable expenditure since it enables risk management. “Extra inventory that mitigates risk is a purposeful investment - not waste,” he explains.
Finally, when it comes to risk mitigation tactics, the following may apply: collaboration, postponement, modularity, redundancy, performance-based contracts and IT investment.
In Kent’s opinion the best option is collaboration. “Working more closely with customers, suppliers and internally; however, most companies are more likely to employ redundancy tactics such as increasing inventory, buffer capacity, multi-sourcing and production flexibility.”
“Collaboration costs less than redundancy but it requires way more dedication to relationships and hard work, bearing in mind that the number on barrier to collaboration is trust.”
“However, it’s worth it in the end,” he concludes. “Making risk management a core competency is what makes the difference between a good company and a great one.”
Pandora and IBM digitise jewellery supply chain
Pandora has overhauled its global supply chain in partnership with IBM amid an ecommerce sales boom for its hand-finished jewellery.
The company found international success offering customisable charm bracelets and other personalised jewellery though its chain of bricks and mortar retail destinations. But in 2020, as the COVID-19 outbreak forced physical stores to close, Pandora strengthened its omnichannel operations and doubled online sales.
A focus on customer experience included deploying IBM’s Sterling Order Management, increasing supply chain resiliency and safeguarding against disruption across the global value chain.
Pandora leverages IBM Sterling Order Management as the backbone it its omnichannel fulfilment, with Salesforce Commerce Cloud powering its ecommerce. Greater automation across its channels has boosted the jeweller’s sustainability credentials, IBM said, streamlining processes for more efficient delivery. It has also given in-store staff and virtual customer service representatives superior end-to-end visibility to better meet consumer needs.
Jim Cruickshank, VP of Digital Development & Retail Technology, Pandora, said the digital transformation journey has brought “digital and store technology closer together and closer to the customer”, highlighting how important the customer journey remains, even during unprecedented disruption.
"Our mission is about creating a personal experience and we've instituted massive platform changes with IBM Sterling and Salesforce to enable new digital-first capabilities that are much more individualised, localised and connected across channels and markets,” he added.
Pandora’s pivot to digital
The pandemic forced the doors closed at most of Pandora’s 2,700 retail locations. To remain competitive, it pivoted to online retail. Virtual queuing for stores and virtual product trials via augmented reality (AR) technology went someway to emulating the in-store experience and retail theatre that is the brand’s hallmark. Meanwhile digital investments in supply chain efficiency was central to delivering on consumer demand.
“Consumer behaviour has significantly shifted and will continue to evolve with businesses needing to quickly adapt to new preferences and needs,” said Kareem Yusuf, General Manager, AI Applications and Blockchain, IBM. “To address this shift, leading retailers like Pandora rely on innovation to increase their business agility by enabling and scaling sustainable supply chain operations using AI and cloud.”
Yusuf said Pandora’s success was indicative of how to remain competitive by “finding new ways to create differentiated customer experiences that protect their enterprises from disruptions to help mitigate risk and accelerate growth”.