Can You Take the Risk?

by Lora Cecere on April 11, 2014 · 0 comments

“This is not a supply chain process. It is a new way of doing business.”

Financial Leader in Discussions on Demand Sensing

In 2013, 80% of supply chain leaders had a material supply chain disruption. It was not just one. The average company had  three. Yet, in a study that we just completed, when asked about business pain, supply chain risk rates low. How come?

It is new.  It lacks a consistent definition and set of practices. Companies reward the urgent. Risk management requires a focus on the important. It requires leadership and orchestration. Teams don’t know what to do. The companies that are the most mature learned the hard way. They had a disruption.

Defining the Topic

Let’s start with a definition. For the purposes of the study that we just completed, we defined supply chain risk management as the proactive identification and resolution of potential risks to the supply chain. The key word in this sentence is proactive. Unfortunately, too many supply chains are reactive. The systems respond, but they do not sense. Performance is measured by indicators, not by performance predictors. The reward systems focus on the urgent, not the important.

In this series of posts, I will be sharing insights from the research from this recent study. This data will also be featured in an upcoming report in our newsletter.

New Insights

When you talk to supply chain leaders about risk management, their answers tend to be hard-wired for supply. Many will wax eloquently about the work that they are doing on “control tower” or “supply chain visibility.” It is not sufficient. We are only dipping our toes into turbulent waters.

I have been working as an analyst in supply chain management for the last decade. In this role, I have done a study on risk management about every five years. I seldom get surprised on study results; but, the answer to the question on risk drivers in this survey surprised me.  As you can see in Figure 1, today it is less about supply and more about demand. The largest gap in risk management expected over the next five years will be the management of global operations. For me, these two trends hop off the page:

  • Increasing Complexity of Operations. With a decade of building global supply chains behind us, companies are feeling the impact. Local regulations, fair labor, variability in shipping lanes, new materials, outsourced manufacturing and faster product development cycles are all contributing to the pain. The financial stability of contract manufacturers and third-party logistics firms is a growing risk. It is not just one factor. We are better at managing regional supply chains than tangled/knotty global ones. The organizational dynamics and politics make regional/global governance difficult.
  • Demand Variability. The biggest surprise for me in the research is the role of demand uncertainty on risk. The building of demand sensing capabilities requires the automation of market sensing and the use of channel data. The change management issues are high. It is difficult for the supply chain to accomplish this by themselves. Why?  The term “supply chain” is politically charged. It has become a function, not an end-to-end process.  Marketing and sales are also functions. The functional approach does not allow us to build demand processes. By and large, marketing and sales are not good at forecasting demand. They introduce bias. To combat this issue, and drive success in demand sensing, many companies have to rename the work stream so that it can truly be an end-to-end focus. For sales-driven and marketing-driven companies, this is a major change management issue.


Figure 1.

Supply Chain Risk Drivers

So, What Should Companies Do?

Recognize the Issue. Simplify OperationsThis includes simplification of the product lines and the definition of standard ingredients and/or interchangeable parts. Our research supports that getting this on the product development agenda is a barrier. Mitigating this risk issue requires striking the right balance between global and local governance. There is less variability in the management of regional supply chains. Accountability and priorities are clearer.

Use Channel Data and Build Demand Sensing Capabilities. Reduce demand latency and automate the processes of demand. I work with many companies on the differences between marketing-driven and sales-driven processes and the journey to become market driven. When marketing and sales operate as functions, they are not aligned to more holistic end-to-end processes. This is growing as an enterprise risk.

Focus Where It Matters. Yesterday, I hosted a webinar with David Simchi-Levi of MIT. He has defined a Risk Index which analyzes the Time for Recovery and the Financial Impact (FI) to analyze the risk of the supplier base. It is a great technique to use in supplier development and network design.  For those interested, check out David’s recent article on Harvard Business Review. His work with Ford is profiled in Figure 2. After the analysis of Ford’s supplier base, David offers recommendations and actions that are shown in figures.  However, to use this methodology requires the organization to be proactive. In the Ford example, the greatest risk was with a tier 2 supplier of O-rings that had low spend. David’s methodology is a stark contrast to the conventional work on supplier development and network design. In the conventional approach, companies would look at the suppliers with the greatest spend and miss the impact on the tier 2 suppliers with low spend. David’s point in the webinar is that you have to be focused and deliberate. Ford has 5,000 suppliers. It is not a simple activity. It requires work. However, based on the results of the study, it is worth it.


Figure 2.

Chart by David Simchi-Levi


The slides from the risk management webinar are now available on SlideShare. Check them out. We will be doing complimentary webinars twice a month in a countdown to the Supply Chain Insights Global Summit. In this event on September 10th-11th, 230 supply chain leaders will gather to focus on the supply chain of the future. With the coalescence of digital manufacturing, new forms of analytics, The Internet of Things, and the collaborative economy, we think that it is time to re-think supply chain practices and imagine what it could be. Today, 45% of the seats are sold. It is limited to 15% technology and consulting attendees. We would love to see you there.



How Do I Know If I Am Ready?

by Lora Cecere on March 27, 2014 · 2 comments

“How can I move the ball down the field, if I don’t have the ball?”

A Question from my Training Class this Week

“How do I know if I am ready for cool technologies? Especially demand sensing and shaping?”

A Demand Planner for a Large Multinational Pharmaceutical Company

Last week was a blur. It was a series of days on planes, trains and automobiles. Unfortunately, it was one of those weeks with pressing deadlines when nothing goes right. I rescheduled my Monday to meet with a client on a pressing deadline and worked through the night to edit and refine the reports/journals for last week’s newsletter. I also continued to work on the manuscript for the book Metrics That Matter to publish in the fall of 2014. The book is now a very worn manuscript.

At the end of the week, we hosted a networking call of the Shaman’s Circle. This is a networking group that meets by phone once a month. No technologists are invited. It is designed to be business leaders talking to business leaders. Each session has a topic. This week’s topic was cool technologies. In preparation for the call, I had given the group a list of emerging technologies that I am watching and I asked each person to come to the call ready to talk about technologies that they are working with. I wanted it to be a discussion about cool technologies, but we quickly got into the subject of adoption.

During the call I got asked a question that made me stop and think. The question was, “Lora, we are a late adopter. We are not comfortable being on the bleeding edge. How do I know if I am ready for these new technologies? Especially demand sensing?”  I thought that this was an excellent question. It is frequently asked. So, I am going to focus here and share my answer:

Demand sensing is the application of analytic technologies to detect short-term patterns in channel data and translate it into distribution requirements. It replaces rules-based consumption in demand planning, and will improve short-term forecasting by 30-35%. The data can be structured or unstructured.

It makes a difference. The average client that has implemented demand sensing technologies has reduced inventory by 11%. So, you might ask, why is this not a no-brainer? The answer might surprise you. Here goes:

-Sales Wants to Manipulate the Data. When sales is incented to move product into the channel, they want to touch the forecast and expedite shipments to make bonus incentives. They are uncomfortable trusting their fate to a black box.

What do you do about it? Find an advocate within sales to help sponsor the project. Help to educate the sales force and consider modifying sales incentives for the first three quarters to let the shipments even out to a pull-based signal. The short-term impact for one to two quarters can be a reduction in shipments even though case fill and end-level consumption will rise. Make sure that this is not a surprise.

-Break Paradigms. Traditional Processes Encourage Bias and Managerial Overrides. The implementation of demand sensing puts the fate of the company in the hands of an optimization tool. It will drive a better answer than managerial overrides; but, for companies that have encouraged managerial overrides and consensus forecasting without the discipline of forecast value-add, expect for it to be a battle.

The answer? Take it slow. Prove that it works and educate the team on how the “touching of demand data” actually reduces demand accuracy. Be deliberate. Communicate often.Understand that people will be uncomfortable.

-It Is All About Influence Management. Be very clear on the goal and work to increase advocacy in finance and sales. Make the project a win-win. Yes, it may decrease short-term sales, but in the longer-term it will increase customer service, reduce inventory and improve the execution of new product launch and trade promotions. Who doesn’t want this?

The answer might surprise you. When I was asked the question this week of  “How can I move the ball down the field if I don’t have the ball?” My answer was for the team to help the other teams understand the rules of the game and work to move the ball down the field together.  Not everyone understands supply chain; and for many, a discussion of demand sensing will sound like gobbledygook.

The success rate is highly influenced by this pre-work. Sell the project internally and find an advocate. And, yes, many companies fail before they succeed. Does this mean the technology is bad? No. It just means that the company didn’t take the right steps to get ready. Remember, many organizations do not understand the basics of demand management. Don’t take it for granted.

Would love to hear your thoughts. I will be landing soon in Philadelphia. Spending the weekend writing and then off to New York to work with a client and then speaking later in the week at a conference. I hope to see you in my travels!