Scoring Your Value Network for Risk

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A previous post in Supply Chain Action introduced some important questions for establishing and sustaining a resilient supply chain.  They included:

  1. How do you evaluate the resiliency of your value network?
  2. Do you have the capability to electronically represent your value network from one end to the other?
  3. Have you determined how to represent the value of inventory, currency and data that pulses along the paths in the value network?
  4. Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?
  5. If so, do you have a plan for dealing with such an interruption?
  6. What have you done to make sure key people know the plan and can execute it?

In addition to my previous two posts, “Building Resiliency into Your Value Network” in Supply Chain Action and my guest post on Bob Ferrari’s Supply Chain Matters, I promised more on the topic. This is a partial fulfillment of that promise.

In the network of suppliers, manufacturing plants, and distribution centers through which you create value for your customers, there reside potential points of failure.  These points of failure can be identified by an item and/or a location.  If the location, say a country or facility in a flood plain is the potential point of failure, then all of the items that are sourced, manufactured or stored there inherit that risk.  But the magnitude of the risk is not the same for every item at that location.  A scheme for scoring value network resiliency is required in order to answer the questions I have noted above.  Here is basic formula that I dreamed up to get your thinking started if you don’t already have one:

Simplistically, resiliency might be said to be (1 – risk) where risk is the outcome of the following expression:

LT/Rd * Rv * M * C * G

where the terms of this expression are defined in the following fashion:

  • Lead Time (LT) – can be analyzed, quantified and expressed in number of weeks or months
  • Redundancy (Rd) – how many substitute products/components or alternative sources exist?
  • Revenue (Rv) – total estimated annual or quarterly revenue (e.g. in $millions) from the sale of an item or from the sale of products in which the item is a component
  • Margin (M) – proportion of the revenue (from the sale of an a single unit of an item and/or from the sale of a single unit of each product in which the item is a component or ingredient) that is gross profit
  • Competition (C) – qualitative strength of the competition (How easily would the competition gain share if your supply were disrupted?), perhaps on a scale from 1 to 5
  • Geopolitical Stability (G) – a qualitative score, perhaps on a scale from 1 to 5

Such a score could then be viewed from either an item perspective or a location perspective.  Naturally, one could look at it by item and location as well.

This is an admittedly imperfect approach (is there a perfect one?), so I hope that you will leave a comment with a suggestion.  Obviously, scalers could be applied to each factor.  The point is that you need some way to evaluate and prioritize risk.

Could this be the basis of something useful?  How does your company measure risk or resiliency?

Philosophical thought for the weekend:  Winston Churchill once said, “Without courage, all other virtues lose their meaning.”

Thanks for dropping by Supply Chain Action.

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Pricing, Promotion, Analytics and SCRM

First, I’d like to take this Veterans Day (it is this Sunday) as an occasion to express my appreciation to those who have sworn to uphold and defend our Constitution with their very life.  From one vet to another, “Happy Veterans Day”.  For those of us who have served or do serve as Marines, a “Happy 236th Birthday“.  May all of us remain faithful to the courage, honor and commitment required of Marines in all areas of our lives – Semper Fidelis!

Second, I’ve put together a few thoughtful questions and some questioning thoughts that I hope will stimulate your mind on three important topics – pricing and promotion of consumer goods, making the most of analytical decision support, and supply chain risk management.

On pricing and promotion in consumer goods

If you are a consumer goods manufacturer, you likely purchase syndicated data to evaluate product trends and share by category, market and channel.  If you are more advanced, you have figured out how to leverage this data in your demand planning process so that your SKU forecasts are more accurate.  But, many firms have not yet incorporated it for the purpose of analyzing and optimizing pricing and promotion decisions.  If you haven’t, why haven’t you?

On making the most of analytical decision support

I have argued in previous posts that the process of analytical decision-making is not just math and data, but it is an interactive process through which the analyst must use his or her experience and skill to artfully find information despite defects in the data and deficiencies in the data model.  One case-in-point would be multi-stage, stochastic, inventory optimization (MESIO – for more, see “Who Is Spending Your Cash?”, the 30 September post from Supply Chain Action).  Consider the possible objectives of an effort to improve inventory (a portion of working capital) efficiency.  Here are a number of possible goals:

  1. Achieve a stated average time between stockouts
  2. Minimize the total value short
  3. Minimize the total stockout occasions
  4. Minimize the cost per unit short
  5. Minimize the cost per unit short per period
  6. Minimize the combined costs of shortage, overage and replenishment (think about shipping an individual unit versus a more economical pack size)
  7. Achieving a target likelihood of no stockouts in a period
  8. Achieving a target likelihood of demand satisfied directly from the shelf (think fill rate)
  9. Using idle capacity to build stock that will sell in a specified period of time

Most off-the-shelf applications will only give you one or two of these objectives and necessarily prohibit interaction of the modeler with the model because the software company needs to protect its intellectual property.

This does not mean that an off-the-shelf application will not work for your business.  It may, indeed, be the best answer and provide an enterprise-scale solution that is fully integrated with your other planning operations.  The point is that you have to do some careful thinking and testing in order to validate that it will work and that you will have whatever ability to interact with the model that your analysts will require.

On supply chain risk management

How do you evaluate the resiliency of your value network?  Do you have the capability to electronically represent your value network from one end to the other?  Have you determined how to represent the value (in terms of materiel, currency and data) that pulses along the paths in the value network?  Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?  If so, do you have a plan for dealing with such an interruption?  What have you done to make sure key people know the plan and can execute it?

Thanks again for dropping by Supply Chain Action.

Until next week, remember this thought from an anonymous source, “Make sure what you do today is important because you are exchanging a day of your life for it.

Have a wonderful weekend!

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