How to Minimize the Risk Lurking in Supply Chain Management Systems

Managing risk is a core aspect of supply chain management, especially in this volatile economic market in which companies are facing uncertainty about supplier viability, shifting commodity costs, and even weather hazards and natural disasters. Here, Knowledge Center contributor Jessie Chimni offers IT professionals five specific recommendations for addressing and minimizing the risk lurking in supply chain management systems.

/images/stories/70x50/bug_knowledgecenter_70x70_%282%29.jpgIn this volatile economic market, companies face potential supply chain disruptions at every turn. While companies work hard to identify, manage and reduce these external risks in order to minimize a hit to the bottom line, they don't solve the threat closer to home (and the one they can actually control): the supply chain system within their four walls.

A recent survey shows that, while most companies invest in understanding and minimizing external risk factors to their supply chain, they have not paid enough attention to their internal supply chain systems and to the risk that emanates from that. This is something that can be easily managed and reduced. The survey reveals a gap between identified risk and resources devoted to mitigating those same risks:

- More than three-quarters of the respondents (77 percent) rated internal risk to their supply chain as medium to high;

- A total of 93.6 percent of the respondents agreed or strongly agreed that the deterioration of data within supply chain planning systems can create unexpected disruptions to those same systems;

- Less than half of the respondents have full-time employees managing supply chain optimization algorithms, heuristics, models and business rules;

- Fully one-quarter of the respondents have absolutely no resources working on demand forecasting models.

Many organizations have invested in supply chain management (SCM) solutions to optimize their supply chain and ensure precise supply and demand plans. Today's most commonly used supply chain systems rely on complex statistical models and algorithms to model demand. They're based on internal factors such as product obsolescence, new product introduction or promotional plans, and on external factors such as market dynamics and competitive issues. Then they use that information to make recommendations on supply, based on material and capacity constraints, cost and service-level objectives, as well as sourcing rules.

While IT organizations are laser-focused on operational systems risks such as data security and uptime, many do not have the resources and skills required to continually adjust the models and algorithm heuristics as external and internal variables inevitably change. If the supply chain models are not adjusted on an ongoing basis, planning recommendations derived from these systems deteriorate over time and the supply/demand forecasts will be inaccurate, introducing another element of risk into the supply chain.

To address and minimize the risk lurking in SCM systems, IT professionals should consider the following five recommendations:

1. Keep business rules current

It is critical to keep supply business rules, such as sourcing rules, lead time rules and substitution rules, current. We recommend performing a review of these rules every other month to ensure that they are up-to-date and reflect your current environment.

2. Keep supply planning heuristics current

Review heuristics within Capable-to-Match (CTM) constraint propagation algorithm to optimize supply planning every six months. This will ensure they map to the current environment.

3. Refine Management by Exception alerts

Refine existing demand planning alerts and add any new alerts to enable Management by Exception. Review these on a quarterly basis, or more often if the company's products and organization are changing frequently.

4. Analyze forecast accuracy metrics

Perform quarterly analysis of forecast accuracy metrics, identifying sources of forecast inaccuracy and addressing it, including use of appropriate statistical models and appropriate history for generating forecast.

5. Refine exception rules

Refine, on a monthly basis, any exception rules on supply planning to ensure all relevant exceptions are flagged and delivered to the right resources for immediate action.

By working in unison with your supply chain team to ensure that business rules, models, alerts and heuristics within supply chain planning systems are kept current with the external environment, a company can significantly reduce its supply chain risk by improving the accuracy of planning recommendations from such systems.

/images/stories/heads/knowledge_center/chimni_jessie70x70.jpg Jessie Chimni is Vice President of Consulting Services at Bristlecone. Jessie has more than 17 years of experience in the areas of supply chain management and business intelligence processes and solutions, particularly in the electronics, semiconductor and consumer packaged goods industries. Currently, Jessie leads all client engagement activities at Bristlecone Americas. He also serves as co-leader for the high technology area of the Americas SAP User Group (ASUG) and is a regular presenter at supply chain management conferences.

Prior to joining Bristlecone in 2000, Jessie held various management positions at SeeCommerce, a supply chain visibility software company, KPMG and Nestle. Jessie received a Bachelor's degree in Economics (Honors) from Punjab University and a Master's degree in Management Studies from Carleton University. He can be reached at [email protected].