Supplying answers: it's impossible to eliminate every risk...

Supplying answers: it's impossible to eliminate every risk in the global supply chain but it is possible to minimize them. Supply strategies for managing the top five supply chain risks

Bob Stoffel

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Summary

* How a company manages its warranty process can affect its reputation for years to come.

* The Holy Grail of supply chain management is to match supply with demand.

* Manufacturing "postponement," that is, delaying the final assembly of a product until a company actually receives the order, is a good strategy for inventory control.

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Supply chain managers aren't necessarily known for being the life of the party, something Alexander the Great noted more than 2,000 years ago. Alexander's conquering army relied on an ancient form of supply chains--"supply trains" that moved with the soldiers--to feed and supply his troops, and his logisticians had to manage the effort.

"My logisticians are a humorless lot," Alexander once famously said. "They know if my campaign fails, they are the first ones I will slay."

Today's logisticians usually don't fear for their lives, but they do have to carefully recognize and manage a number of potentially crippling supply chain risks. In the April 15th issue of this magazine, we described five main areas of supply chain risks: disruptions in supply, changing demand, financial risks, legal and security risks and risks to corporate brand and reputation.

There's no way to completely avoid these risks. But there are some important strategies for managing risks in each of these five areas.

Three out of four supply chain executives at major U.S. enterprises have experienced a supply disruption in the last five years, according to an Accenture study. These disruptions can be caused by any number of factors, including: natural disasters, infrastructure failures and congestion, labor unrest, and failures of distant suppliers to fulfill their commitments. Sometimes, even geopolitical events can intervene.

The 2008 Summer Olympics, for example, threaten to complicate supply logistics in China from mid-July to early September. To limit the amount of smog that might harm the performance of Olympic athletes, the Chinese government plans to temporarily close some factories and limit trucking around Beijing. Companies and carriers that do business in China are already making contingency plans around the delays these actions will cause.

Regardless of the nature of supply disruptions, stock-outs and missed deliveries are risks that must be minimized. Companies doing business globally know that things can go wrong quickly and often unexpectedly. Therefore, smart companies do two things: They draw up detailed contingency plans. And they form ongoing relationships with full-service, integrated logistics providers.

Contingency planning starts with the basics, including identifying where your products are sourced and manufactured, who distributes them and to whom they are ultimately shipped. The next step is to partner with alternate suppliers in different regions of the world that are able to ramp up on a moment's notice. Contingency plans should also include provisions for building strategic safety stock, scenarios for switching transport modes--say, from ocean to air--and arrangements for hiring secondary transportation and distribution partners.

Companies can certainly assemble these contingency networks in piecemeal fashion on their own. But the best way to for companies to leverage their logistics capital and optimize total distribution costs is to let integrated third-party logistics providers, or 3PLs, do the work.

Why rely on outside experts? 3PLs often own and operate their own integrated global, multimodal networks, meaning that they have the flexibility to switch among transport modes and the control to keep shipments moving in the face of disruptions. 3PLs are also major customers for transportation assets that they don't own, such as ocean cargo lines, so they have the clout to book extra space when everyone else is clamoring for it. 3PLs also offer single source accountability so your management efforts are simplified when problems occur.

The time to create relationships with full-featured 3PLs, it's important to note, is before things go awry. This way, when disaster strikes, 3PL clients can get in the front of the line for contingency shipping and expedited services.

DEMANDING TIMES

Supply disruptions cause stock-outs. Changes in demand can cause the opposite problem: excess inventory. And inventory isn't cheap. Carrying costs, interest and taxes can represent a significant slice of overall logistics costs. And the longer products sit in warehouses, the more value they lose. That's particularly true in the high-tech industry, where products can depreciate about 1 percent a week. The Holy Grail of supply chain management is to match supply with demand. That's not always possible, but there are two strategies that help companies move closer to the goal. One is the just-in-time fulfillment model that's been the preferred approach for many companies for a couple of decades. With just-in-time fulfillment, supply is generated only on demand, and safety stock is minimal. Inventory costs are kept low and so is the risk of obsolescence.

Just-in-time fulfillment relies, of course, on tightly aligned supply chains that synchronize the flow of goods, information and funds. Access to a multimodal global network and sophisticated tracking systems are prerequisites for this approach.

A second strategy for minimizing the impact of falling demand and the resulting excess inventory is an approach called postponement. With postponement, companies recognize that they can't always accurately forecast demand for specific product variants. So they postpone the final phase of manufacturing until they receive actual orders.

What postponement means practically is that companies can store product components that can be mixed and matched for kitting or light assembly at points just before the final products are sent for delivery. Instead of, for example, producing individual stock keeping units of cell phones that have the same basic guts but differ as to handset color, faceplates and straps, cell-phone providers might store the components and kit the phones according to individual purchase orders. This way, the company can better match supply with demand and isn't stuck with inventory of product variants that might not sell well.

Today's longer cross-border supply chains present greater financial risks. Establishing a global logistics network can devour capital. It can take longer to get paid by overseas buyers--120 days or more. It can be more difficult for companies without strong credit to find financing based on international inventory as collateral. And greater distances mean greater risks of damages.

Capital is always limited, and companies are constantly looking for innovative ways to free it up. One common strategy is to outsource supply chain logistics to 3PLs. Instead of investing millions of dollars in fixed costs to build and operate their own logistics networks, companies can piggyback on the networks of integrated providers that offer pay-as-you-go services and a variable cost structure. Regardless of who owns and operates the logistics networks, maximizing cash flow and accelerating order-to-cash cycles requires creative financing approaches when global transactions are involved. One common strategy to accelerate cash flow involves discount payables. Integrated carriers have an advantage when it comes to discount payables services, because they have physical custody of the goods in transit as well as visibility systems to tell them exactly where the orders are in the supply chain. Carriers like UPS offer discount payables services that can send payments to sellers within two or three days of confirmation that the buyer has agreed to purchase the goods. In exchange for the benefit of getting paid so quickly, the seller agrees to receive discounted payments. Accounts receivable factoring is a similar approach to payment acceleration.

Global asset-based lending is another strategy to finance global supply chains. Companies need financing to buy raw materials, meet payroll and get additional working capital to expand trade. Traditionally, it's difficult for companies to obtain collateral financing for inventory that is in transit, as is the ease with international shipments that can take 30 days to cross the ocean. Because full-service 3PLs like UPS have control and visibility over the shipments, they can provide additional working capital using overseas inventory as collateral--as soon as the shipments cross the dock at the port of origin. Similar asset-based financing services, like container finance, are available for smaller, more infrequent shippers.

For U.S. companies that sell to buyers in other countries, the Export-Import Bank of the United States offers financing to these foreign customers. Master agents of the Export-Import Bank can help American companies connect their customers to these financing sources.

Yet another financial risk mitigation strategy involves purchasing various forms of insurance. Companies can, for instance, take out credit insurance in cases where they're not comfortable with the creditworthiness of a new customer that might be located overseas. Cargo insurance is an important option for international shipments that can be damaged on ships, in airplanes or in drayage. And flexible parcel insurance can provide compensation for time-sensitive or perishable small package shipments that aren't shipped on time as promised.

Complying with all the legal, security and environmental requirements that affect global logistics ultimately hinges on one thing: information visibility across the entire supply chain.

Customs security measures after Sept. 11, 2001, have certainly raised the level of scrutiny and the need for information systems that transmit detailed shipping manifest information to customs officials. In fact, U.S. Customs and Border Protection is in the process of implementing its "10+2" initiative, which requires 10 new pieces of information from importers and two additional pieces of information from carriers. The risks of having goods held back for inspection which can destroy just-in-time commitments--have led many importers to get accredited as trusted shippers so their shipments can enter the Customs fast lane.

There are additional risks at the border: When it comes to paying import duties, importers must correctly classify their products or face stiff fines.

All importers need to ensure that their accounting and logistics systems serve up the right level of detailed shipment information at the right time to satisfy customs and regulatory agencies. The right time often means transmitting detailed shipment--down to the SKU level--hours before the shipment crosses the border, regardless of how many times the shipment has changed hands along the way.

To make matters even more complicated, regulatory and security compliance is a moving target, with new requirements arising every year. One key option is to turn to outside experts who specialize in trade compliance and customs brokerage to help keep a company's operations on the right side of the law.

To manage the kind of risks that can damage a company's brand and its overall image, sometimes it's just as important to know how to retrieve products from customers as it is getting products to customers in the first place.

When products break, how a company manages warranty processes can affect the company's image for years to come. Then there are the myriad environmental regulations around the world that hold product manufacturers liable for things like improper disposal of hazardous materials in landfills.

Companies cannot wash their hands of responsibility once their products are sold. In the ease of product recalls, companies need to create contingency plans that lay out precisely how the company will use supply chain information systems to identify, who might have purchased its products. One way is to have a well-established disaster scenario plan between suppliers, transportation companies and end-market channels.

Importantly, companies should also have access to reverse logistics networks that enable them to collect defective or dangerous products from customers and dispose of them properly.

Reverse logistics planning is also important for handling of warranty repairs. Where do customers take products to get repaired? Who pays for shipping, who makes the repairs, and how quickly can the company get repaired products back in the hands of customers?

Companies also have to identify the varying environmental requirements for product manufacturing, distribution and end-of-life disposal around the world. When a product with materials that can be hazardous to the environment reaches end-of-life, how should customers properly dispose of it?

One doesn't have to manage these risks alone. Both integrated logistics providers and specialists in warranty repair and environmental compliance offer reverse logistics services that can help a company preserve its brand value while protecting its customers and the environment.

Risks are a part of doing business. Unlike those who coordinated Alexander the Great's military campaigns, logistics managers today don't have to fear for their lives. But how they manage the five main areas of supply chain risk can mean the difference between serious business setbacks and marketplace victories.

@ On the Web

* An excerpt from our supply chain survey, done in conjunction with Marsh, along with a link to the full report.

* Access to the Accenture and FM Global supply chain study.

* 10 + 2 =? for your supply chain.

www.riskandinsurance.com

BOB STOFFEL is senior vice president of engineering, strategy and supply chain at UPS. He can be reached at riskletters@lrp.com.

COPYRIGHT 2008 Axon Group
COPYRIGHT 2008 Gale, Cengage Learning