236 • Supply Chain Risk Management: An Emerging Discipline
these customers do not have to worry about the risk that comes from
being associated with foreign apparel factories that have abhorrent work-
ing conditions.
Supply Chain Design Flexibility. Dell Computer, a company that faces
strategic risk as customers shi from PCs and laptops to tablets and other
devices, realized that the responsive supply chain it established to support
make- to- order online sales was not necessarily the right supply chain to
support its expansion into retail sales and other market segments. is “one
size ts all” supply chain did not t Dell’s needs at all. Dell has since devel-
oped four supply chains, each dedicated to a dierent customer segment,
that give the company added exibility to respond to a broader array of mar-
ket opportunities. e build- to order supply chain supports Dell’s online
customer segment; the build- to- plan supply chain supports the retail seg-
ment; the build- to- stock supports the online/ popular congurations seg-
ment; and the build- to- spec supply chain supports the corporate segment.
16
Logistics Flexibility. Logistics exibility means being able to adjust the
route taken to move goods, funds, or information between points or pro-
vide choices across dierent modes of transportation. A $2 billion pipeline
(clearly a xed, inexible mode of transportation) designed to take plenti-
ful crude oil from West Texas to California is failing to generate interest
among large California reners because of the exibility oered by rail
cars. Relying on rail shipments to transport oil allows reners to source
from dierent locations around the United States and route the oil to their
California reneries, something that is not feasible with a xed pipeline. A
growing supply of North American crude oil is coming from various loca-
tions where prices uctuate, allowing reners to use dierent routes and
modes of transportation (i.e., rail cars) to make opportunistic purchases
for their crude supply.
17
Material Flexibility. In the not- too- distant past the price of nickel
soared, making it a cost- prohibitive item for companies that rely on stain-
less steel 318, an industry standard item that contains nickel. One indus-
try that was hit particularly hard includes companies that manufacture
vehicles to carry food products. Material engineers were able to shi to
“lean duplex,” a type of stainless steel that oers material properties that
are 30% to 200% better than traditional alloys with only a fraction of the
nickel contained in other stainless steels. Lean duplex also oers higher
yield strength, making it less susceptible to cracking and corrosion.
18
Material exibility helped the producers of tank trailers avoid nancial
risk from commodity volatility.
Emerging Risk Management Tools, Techniques, and Approaches • 237
CREATE A RISK WAR ROOM
Close your eyes and think about walking into a room where risk man-
agement information is collected, categorized, analyzed, prominently
displayed, and widely disseminated to the right people at the right time.
Imagine having a dedicated sta tasked with the responsibility for moni-
toring supplier health, collecting and analyzing third- party data, spot-
ting disruptive weather patterns, tracking material movement around the
globe, updating in real time a dashboard of risk- related metrics, follow-
ing political and business news and trends, responding to specic risk-
related information requests from internal customers, and sending early
risk warnings to those who would benet from that information. is sta
would also help local units develop their risk management capabilities.
is room would also allow users to ag supplier names or purchase com-
modities for alerts when noteworthy information becomes available. A
central role of the war room is to act as a repository for storing, interpret-
ing, and disseminating as needed, risk- related intelligence.
Several trends make the war room an attractive possibility when think-
ing about supply chain risk. Without question we are seeing a general
movement (at least in some areas) toward greater centralization and cen-
trally led leader ship within supply chain management. It is time for risk
management to join the list of activities that would benet from a central
leader ship focus. Secondly, widely dispersed supply chains and economic
uncertainty are combining to make risk more rather than less critical as a
supply chain topic. And nally, technology is available that can search and
capture data and information in real time around the world.
Part of the war room can be outsourced to risk event specialists. One
such specialist is NC4, a California company that provides detailed and
real- time threat intelligence to clients about global risks and changing
conditions that can aect operations and the safety of traveling employ-
ees.
19
e company scans databases and news feeds around the globe 24/7
to provide a real- time assessment of global incidents and assigns a mag-
nitude or priority on a global situation map (along with other risk- related
services). is information is available graphically at the company’s com-
mand centers as well as each client’s headquarters. e combination of
in- depth global risk analysis, tracking of employee worldwide travels,
and real- time incident alerts can provide predictive intelligence to those
responsible for the well- being of employees and company assets.
238 • Supply Chain Risk Management: An Emerging Discipline
MANAGE WORKING CAPITAL
For many companies the notion of managing working capital is evolving.
From an accounting perspective, working capital is simply the dierence
between current assets and current liabilities, information that is readily
available on a company’s balance sheet. Unfortunately, this is not the best
way to look at working capital from a supply chain risk perspective. A dif-
ferent way to think about working capital is from an operational or supply
chain perspective, which Figure12.2 illustrates.
Extending payment terms to suppliers is an enticing option for man-
aging working capital, particularly to the nance group. Unfortunately,
stretching supplier payment terms directly aects, and not in a good way,
relationships with suppliers. e CEO of Federal- Mogul Corporation, a
tier- one automotive supplier, announced his company no longer planned
on extending longer payment terms to customers aer it saw a large cash
outow due to extended terms. According to the CEO, “If we need to lose
market share because of our terms, I’m willing to concede business if we
cannot continue to operate on the margins or the terms that are reason-
able for our organization.”
20
What are some of the potential risks associ-
ated with extending payments to suppliers? Stretching payment terms can
Operational Working Capital =
Raw and
Direct
Materials
Work-in-
Process
Finished
Goods
Accounts
Receivable
Accounts
Payable
++
+–
Extend
payment
terms days
to supplier
s
Accelerate
payment
collections
from
customers
Practice
make to
order/ship
direct
wherever
possible
Focus on
faster process
throughput
with ecient
layout and
work cells
Receive more
frequent
deliveries to
lower average
inventory
levels;
negotiate lower
purchase prices
Supply Chain Tactics
FIGURE 12.2
Managing operational working capital.
Emerging Risk Management Tools, Techniques, and Approaches • 239
• Force suppliers to recoup extra costs by increasing purchase prices
• Aect the buyer– seller relationship to the point where suppliers do
not view the buyer as a desirable customer
• Adversely aect a supplier’s nancial position, which could lead to
supply disruptions
• Force suppliers to secure short- term nancing to cover cash shortfalls
• Create unhealthy power struggles between suppliers and customers
Dozens of ways exist besides extending payment terms to better manage
working capital, particularly the inventory portion of the equation. Do not
forget that inventory is a complex topic that can be managed through three
separate approaches—the volume, the velocity, and the value of inventory.
If your company could only select two approaches to focus its working
capital improvement eorts, controlling inventory through perfect record
integrity and eective demand estimation and management should be at
the top of the list.
Controlling Inventory through Perfect Record Integrity
It is dicult to manage something from a risk perspective when you can-
not control it. is includes the amount of capital tied up in supply chain
inventory. A key objective across every part of the supply chain is to have
record integrity that is as close to perfect as possible. Inventory control
means that we know exactly what we have, how much we have, and pre-
cisely where it is located. Whether we have the right quantity and type
of inventory and if it is positioned correctly are not answered by eective
inventory control. ose topics are part of inventory management.
Record integrity or accuracy exists when the physical inventory on hand
equals the computerized or electronic record on hand (POH = ROH),
regardless of the quantity of inventory. Any dierence between POH and
ROH represents error that increases supply chain risk. is error can be
the result of operationally mismanaging inventory, which aects the phys-
ical (POH) side of record integrity, or from systems- related discrepancies,
which aect the computerized (ROH) side of record integrity.
When record integrity is lacking, steps must be taken to identify the
sources of error with corrective action taken. In many ways the pursuit of
perfect record integrity is similar to the pursuit of perfect product quality.
When a nonconformance occurs, in this case a mismatch between physical
240 • Supply Chain Risk Management: An Emerging Discipline
inventory and its corresponding inventory record, the search for root
causes should commence. is search will require asking and answering
some important questions that address both the physical and informa-
tional side of inventory control, including the following:
• Are record errors displaying a random or systematic pattern
across stock-keeping units (SKUs)?
• How severe are the dierences between physical stock quantities and
electronic quantities?
• Are proper receiving, stock- keeping, and withdrawal procedures
and systems in place?
• Are suppliers shipping quantities that match their documentation?
• Are eective and timely cycle- counting procedures used?
• Is inventory scrap and obsolescence accounted for correctly?
• Is inventory the a problem?
• Are employees trained to properly move, handle, and disburse material?
Perfect or near- perfect record integrity is never an accident. It is the
result of various activities and procedures designed to ensure the amount
of physical inventory equals the computerized record of inventory on
hand. Poor record integrity contributes directly to greater operational and
nancial risk. Pursuing perfect record integrity directly reduces exposure
to those risk categories.
Effective Demand Estimation and Management
Perhaps the most important information that ows across a supply chain
is all the claims on a company’s output for a particular period, includ-
ing forecasted demand, actual orders for which commitments are already
made, spare parts requirements to support aermarket needs, and adjust-
ments resulting from changes in inventory policies. ese combined
claims represent a company’s demand estimate. It is startling how many
systems use demand estimates as their primary data input. One could
argue persuasively that demand planning is a company’s most important
process, particularly when managing supply chain risk.
e counterpart to demand planning is supply planning, which involves
the steps taken to ensure that materials, components, and services are
available to support the demand plan. Unfortunately, the coordination
and hand- o of information between the demand and supply sides of the
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