TABLE 7.2 Demand Risks

Demand Risk Cause Horizons Traditional Remedies

Forecast error Seasonal issues, lead times, poor information, inadequate systems, poor communications, inadequate skills

Both Statistically derived safety stock, buffer stock points, excess inventory throughout supply chain Time delays Customer changes,

systems issues, product issues

Both Rescheduling, price concessions Outbound

transit times Carrier issues, acts of

God, customers’ issues Both Carrier discussions, customs calls, freight poor execution on both sides

Operational Constant conference calls, rescheduling

manufacturing and deliveries, stealing product form other customers Customer

bankruptcy Poor execution, fraud, corruption, sell out by owner

Both Possible loans, possible merger or partnership Product

failure Poor quality control, material issues,

Both Law suites, litigation, government involvement, fines and penalties Customer loss All of the above issues

and more Both Sell off material designated

for customer, write off if specific and scan for new customers

New product

introduction Poor planning, poor communication throughout organization, poor execution, poor assumptions

Both Ad hoc meetings, excessive overtime, price

oversight Both Fines, penalties, and

operating restrictions

have a nasty habit of continually arguing about changes to pricing and delivery dates and have a propensity to surprise suppliers with unplanned or poorly communicated product promotions of the supplier’s products at their stores.

When a customer surprises a supplier with a promotion of the supplier’s product, the resulting demand tends to be at least three to four times the forecasted level of sales, something that wreaks havoc on the supplier’s supply chain. The typical approach to respond to this situation is to reallo-cate product within the supplier’s bill of material to satisfy the promotion.

This approach tends to result in excessive overtime at the supplier, total disruption of the supplier’s supply chain– planning processes, and aggra-vation to other customers when their delivery promises are rescheduled.

And finally, if this risk is perpetuated, or becomes chronic at a supplier, the outcome tends to be a reduction in customer relationships and ulti-mately a loss of customers.

Product Risk. Poor product portfolio management is another important aspect of this risk pillar. By far the largest risk in this category is product failure and warranty issues. An example we all have witnessed over the last couple of years is Toyota’s issues with braking systems, accelerators, and massive product recalls. Automobile manufacturers run the num-bers on their risks associated with product liability and warranty prob-ably better than most manufacturers. Their risk appetite is usually quite high and they utilize many diverse liability, tort, and warranty insurance packages to mitigate those risks. However, continued product recalls, regardless of the industry, can lead to customer loss, fines, penalties, and potential bankruptcy. Witness what has happened at General Motors.

One of the most difficult elements in this pillar is new product introduc-tion. Forecast error for products continually produced and sold to cus-tomers can become as large as 40% for a given product. Forecast error and the impact on the company of poorly launched new products can be even more dramatic. We mentioned this aspect of demand management and supply chain management in Chapter 4. Poor assumptions for poor plan-ning and poor communications relative to new product launches can be devastating. An example is the growth of Apple’s iPhone and Samsung’s Galaxy products at the expense of Blackberry’s product portfolio.

There are traditional approaches to mitigate product- planning risks including collaborative planning, forecasting, and replenishment (CPFR) tools that provide a vehicle for demand collaboration between suppliers

and customers. CPFR is utilized in the consumer packaged goods and retail industries. The sales & operational planning (S&OP) process acts as a framework to assist companies in their efforts to balance supply with demand to minimize surprises and maximize profits for the entire enter-prise. We will discuss these in more detail in Chapters 9 and 12.

Logistics Risk. In this risk pillar, logistics relates to outbound mate-rial that perhaps goes to a final assembly/ package partner, a distribution or warehouse, or the final customer. Most of the logistical discussion we engaged in within our supplier risk segment applies in this arena as well.

Most manufacturers do not maintain their own truck, barge, rail, or ship fleet. As mentioned earlier, thousands of 3PL companies will haul freight better, faster, and cheaper than most manufacturers. One nuance is the approach that utilizing 3PLs to deliver finished goods to customers is a form of risk mitigation due to better performance, or if contract verbiage with that carrier includes sharing or pooling of the risk in case of an acci-dent. In the chemical industry, contracts specify not only what we call service level agreements (SLAs) but also language that shares the liability risk of an accident with both parties. This has been a traditional remedy to improve service deliveries, reduce the cost of transportation, maximize profits, and minimize risk.

Process Risk

In this risk pillar, which a cursory glance at Table 7.3 reveals to be exten-sive, the risks are inherently positioned within an organization. Another way to think about this is that the organization has better control of these risks because they occur within their own domain. The frequency of occur-rence and the remedies many organizations utilize to solve these issues lie within their own four walls. Our categories for this risk pillar discussion will be known or hard risks, unknown or soft risks, and chronic risks that can arise within a company’s four walls.

Known Risks. These are risks that are measurable and can be planned for. Known risks, also called hard risks, include process breakdowns, poor material, poor quality control, criminal activity, poor and unreli-able systems, and failure of a company’s facilities and assets. Known risks from Table 7.3 could include manufacturing yield, capacity, information delays, systems, receivables, payables, inventory, and planning. Most of

TABLE 7.3