TABLE 7.1 Supply Risks

Supply Risk Cause Horizons Traditional Remedies

Supplier lead

times Material/ capacity issues Both Buffer stock, larger order quantities

Supplier

quality Manufacturing processes Both Contract verbiage, penalty clauses, inbound inspection

Transportation

lead time Breakdowns, acts of God,

customs issues Both Contract verbiage,

penalty clauses Subcontractor

availability Initial source can’t deliver Both Contracts for potential capacity reservation Supplier

pricing Performance issues, contract

changes, breach of contract Tactical Due diligence, phone- fax, and possible visits Time delay Customs, lack of

performance Both Buffer stock, rescheduling

final delivery Disruption Labor issues, natural

disasters, terror Both Buffer stock, safety stock, second source capacity Import delays Customs paperwork, port

strikes, labor issues Both Additional freight forward companies, calls to government contacts Supplier

insolvency Poor management, acts of

God, force majeure Both Loans, law suites, litigation, and second sourcing

Fraud/

corruption Poor government oversight Both Fines, penalties, and operating restrictions Counterfeit

material Poor government oversight Both Fines, penalties, and operating restrictions Supplier

delivery Manufacturing issues, quality issues, customer requirement changes

Both Buffer stock, warehouse inventory, second source

One reason was companies found that there were many organizations around the globe that could do certain business functions better, faster, and cheaper. And at that time, as the Internet was exploding on the sup-ply chain scene, there was renewed interest in exploiting the World Wide Web to collaborate with these new BPO organizations and new partners to drive overwhelming top- line growth.

With that belief,a new industry called third- party logistics, or 3PLs, was born. A quick story about the chemical industry in 2000 will perhaps pro-vide some context regarding the growth of 3PLs. During this period the chemical industry was still vertically (i.e., functionally) aligned in terms of supply chain management. There were several reasons that many organi-zations had not embraced the concept of supply chain management. First, many organizations had very good profit margins and did not see the need for change. Second, the “chemists” were still running chemical compa-nies and lacked supply chain knowledge. And third, the chemical industry was still an asset- intensive industry that believed in the benefits of verti-cal integration.

During this time, a few leading- edge chemical organizations began benchmarking their total logistics costs associated with inbound and out-bound material delivery as a percent of total sales. The numbers were alarm-ing. On average, the chemical industry’s transportation costs were more than 10% of sales. As the industry benchmarked against other industries, it came to the conclusion that while chemical companies were good at breaking down hydrocarbons, these companies were not so good at logis-tics. As a result these companies, like so many in other industries, out-sourced their logistics to companies that could service their needs at a much reduced rate.

If we scan Table 7.1 and view the logistics risks, we’re not saying the BPO approach has totally eliminated logistics risk. However, these outsource providers have developed many tools and techniques to manage risk for their customers. Many of the traditional remedies are still being leveraged but by a new industry that tends to have much more experience in global trade and has invested in more advanced tools and techniques.

Fraud, Corruption, and Counterfeiting Risks. The European Banking Board has developed a set of baseline definitions for their employees and their customers to follow. Fraudulent practice means any action or omis-sion, including misrepresentation, that knowingly or recklessly misleads or attempts to mislead a party to obtain a financial benefit or to avoid an obligation. Corrupt practice means the offering, giving, receiving, or

soliciting, directly or indirectly, of anything of value to influence improp-erly the actions of another party.¹ Counterfeiting occurs when something is made in imitation so as to be passed off fraudulently or deceptively as genuine.² This portion of supplier risk is far too large to dig deeper into at this time, but we will talk at length about fraud, corruption, and counter-feiting in Chapter 8.

Demand Risk

Demand management has always been a difficult discipline by defini-tion. Part of this is due to the tendency of forecasts that are almost always wrong to some degree. Demand management and forecasting techniques and solutions have been available to the supply chain profession for over 80 years. There are hundreds of deterministic, statistical solution provid-ers that provide companies with the ability to scan historical sales to arrive at a forecast using techniques such as least squares, time series analysis, and regression analysis. We’ll talk in more detail about these techniques in Chapter 10, but for now we’ll segment the demand risk discussion into customer risk, product risk, and logistics risk.

Customer Risk. As shown in Table 7.2, there are plenty of risks on the customer side of the equation. The demand issue tends to get the most focus because the purpose of demand estimation is to project what a cus-tomer will buy, when they will buy it, and how many they will buy. With complex supply chains and large product portfolios, not even considering global markets, seasonal products and other extraneous factors, the task is somewhat daunting.

Forecast error is a key risk in demand management that requires atten-tion. The reason we focus on this risk, is that it runs from 10% error of forecast versus actual at the aggregated product family level to more than 40% error at the stock- keeping unit or item level. (Forecasts almost always become less reliable as the forecasts become more granular rather than aggregated.)

The traditional remedy to mitigate forecast error has been to statistically calculate safety stock and develop buffer stocks at choke points through-out the supply chain. The supply chain profession has been working for more than 50 years to mitigate the risk of attempting to project what their customers will buy and balancing supply to ensure superior service levels to those customers. And industrial customers are in no way exempt from providing additional risk to this pillar of supply chain risk. Customers

TABLE 7.2