Supply Chain Risk and How to Mitigate
Planning is all about risk mitigation. Risks come in many forms: too much inventory, too little inventory, not enough to meet the demand, delivery interruptions because of weather, supplier issues, Acts of God, sanctions, labor disputes and so on. We also plan because we cannot react fast enough when the need arises. The more reactive we are the less planning is needed. How far in advance we plan has to do with how fast we can get what we want. Not every little detail needs to be planned. For example, when you plan for a road trip there is no need to plan for all the bumps on the road. The shock absorbers take care of that. Because they can react a lot faster and therefore remove the need for that level of planning. Furthermore, there is very little “cost” associated with running into small bumps on the road. However, if there is a potential snow storm on the day of travel then the cost might be a lot higher and re-planning needs to be done unless you have already accounted for this risk!
How can we do that? When the original plan was made, because of the season there was a chance of winter storm on that day of travel. We should have sufficient data (in our head for this situation) that indicates snow could be an issue during the winter season in certain parts of the country. Therefore, a risk factor needed to be attached to the plan for that reason. If the risk factor is high enough then a plan B is devised. The latter could be acquiring snow tires or taking the train amongst others. A summer travel would not have that risk factor but it might have other potential risks. Thus, plans and risks go hand in hand. With every plan, the associated risk needs to be taken into account to ensure that when and if the plan cannot be executed what the potential cost would be. Is there an alternative plan? Is it more expensive? And is the cost high enough to pay the premium to avoid the potential cost?
In supply chains, we are constantly facing these situations. However, we are not necessarily aware of all the underlying trends and moving parts that change the risk factors. For example, if the product mix changes, then our reliance on some suppliers become more than before. And if these suppliers are single-sourced and/or in earthquake zones then we could be facing a much higher risk than before the product mix was changed. If a new product is introduced and demand is much higher than expected, then do we have the additional capacity needed by the subcontractors to meet the surge in demand?
This is where planning systems become extremely valuable. A planning system has to be able to perform two tasks: Look for underlying changes in risk factors as plans are made for the future and identify the areas of brittleness. Secondly, when and if the risks are too high and the cost is justified, recommend alternative plans as to what can be done when and if the inevitable but unexpected occurs!
Performing such tasks is beyond the capability of human mind especially when it is done in an almost real-time manner. A note of caution, what we are describing here is not just a “what-if” analysis. This is having a system that is intelligent enough to evaluate the future risks and make changes to the plan and/or recommendation as to what needs to be done, based on the severity of the risks.