Risk Mitigation In Supply Chain Management Using Analytics Modeling

Companies around the world rely on strong supply chain management to ensure profitable and sustainable businesses. Their practices help reduce order-to-delivery time, improve sales and operations (S&OP) planning, improve financial performance and build trust among suppliers, amongst myriad other benefits. There are, however, many factors that can negatively impact the efficacy of supply chains. Examples of such factors include:

  • Raw material price fluctuations,
  • Currency fluctuations,
  • Market changes,
  • Energy/fuel price volatility,
  • Environmental catastrophes

In order to optimize the performance of supply chains and manage risk it is therefore imperative to understand these factors and prepare for the expected repercussions of uncertain events.

To illustrate the effects such an unforeseen event can have on a supply chain, consider the devastating explosions that rocked the Chinese port city Tianjin recently. Tianjin is one of the world’s busiest ports. Major multinationals including Wal-Mart Stores Inc., Airbus Group SE and Deere & Co. operate distribution centers or factories in the area. An event of such magnitude will inevitably lead to the closure of industrial and processing facilities within the port until it is safe to resume operations. Even after the area is declared safe to operate within, it will take time before the port operates at its usual capacity. This will result in massive delays in goods that are stored at the docks or goods that need to be transported via the port. This can have a significant impact on business and financial performance of companies using the port. A company for which going through the port in Tianjin is a step in the supply chain will need to reroute orders incurring various expenses and delays. This could lead to various SLAs with customers being violated thereby incurring penalties and tarnishing the company’s brand. A range of other knock on effects through the supply chain can be expected.

The use of analytics modeling with scenario analysis can help companies understand the extent to which various risk factors might affect their business. A high fidelity model of the business with all the relationships in the business expressed in a quantitative manner will enable the business to compute the knock on effects of changes in the supply chain. Modeling will help identify threats, anticipate potential disruptive scenarios and facilitate the implementation of risk mitigation strategies and techniques through business continuity planning before a disruptive event occurs. Ideally these models should also be visualised in interactive dashboards so that scenarios can be dynamically generated, interrogated and the results easily consumed and understood.

Having such information will allow one to adapt swiftly to disruptions and to take appropriate measures to mitigate risk. Examples of such risk mitigation measures include keeping insurance contracts up to date with risk exposures at various places in the supply chain as determined by the modelling. Relationships with alternative suppliers through various channels may need to be negotiated and be on standby. Safety stock levels of certain product lines may need to be increased. Goods may be sourced through a variety of ports in order to get the benefits of diversification whilst keeping costs at a level below that of pursuing alternative risk management strategies (all of these will need to be modelled in order to be able to make this judgement call).

Having a living model of your supply chain will enable you to constantly optimise it as well as plan to minimize the negative impact of scenarios such as the Tianjin explosion.

BusinessOptics platform is perfectly suited for modelling and optimisation of business processes. With BusinessOptics, you can quickly build models to analyse and optimise your logistics operations across all aspects of the supply chain. The large selection of visualisations make it easy to create interactive dashboards to interrogate and compare different scenarios. These dashboard can easily be shared across your organisation.

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