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May 17, 2012

Risk Management: Mapping Supply Chain Risks

An increasing number of supply chains disruptions over the past couple of years have brought the subject of risk management to the top of many executives' priority list. Supply chain risk management, however, is not a new concern. As a field of research and practice, it has been around for some time. Admittedly, however, it has gained new prominence over the past decade. For example, in 2005, the same year that Professor Yossi Sheffi from the Massachusetts Institute of Technology wrote a seminal work entitled The Resilient Enterprise that examined disruptions in corporate supply chains, Cisco Systems Inc. founded the Supply Chain Risk Leadership Council. ["An Introduction to the Supply Chain Risk Leadership Council," SupplyChainBrain, 19 April 2012] John J. Brown, director of risk management with The Coca-Cola Co., told the SCB editorial staff that the Council "was created to bring together risk-management experts who could share best practices and bring process standardization to the way in which risks are identified in the global supply chain." Obviously, experts wouldn't have been available to discuss the topic had the field of supply chain risk management been immature. The article continues:

"Brown defines 'risk' as 'nothing more than uncertainty.' It can be found just about anywhere in the global supply chain, touching all processes from raw materials to final delivery of product. Quickly joining Cisco in the initiative were major companies such as FedEx, Procter & Gamble, John Deere, Merck, Intel and General Electric. The wide breadth of industries represented 'is part of the value in coming together,' Brown says. 'The cross-fertilization of practices [can be] used for different supply chains.'"

Long-time readers of this blog know that I'm a fan of cross-fertilization of ideas and disciplines -- what Frans Johansson calls "The Medici Effect" (see one of my early posts entitled The Medici Effect). The article continues:

"Trying to fashion industry-wide standards is 'not a rewarding process,' says Brown. There are too many consultants and certification bodies already attempting to do just that. 'There's a lot of self-interest in developing or proliferating standards and certification,' he says. 'It's not going to improve the way you do things.' The better path is to compile and document existing best practices, and share them with as wide a membership as possible. 'The more we can improve risk management practices in all industries,' Brown says, 'the better it's going to reflect on our [individual] company's performance.'"

Implementing risk management practices is not cost-free; but, not practicing risk management comes with a much higher price when (not if) bad things happen that can affect supply chains. The article concludes:

"The biggest barrier to effective risk management today is the ability of most companies fully to document their supply chains, covering the physical flow of goods from end to end, says Brown. Most fail to understand the global connectiveness of their systems, so that a disruptive event in one location can affect every other link of the chain. The Japan earthquake, for example, ended up having a severe impact on the global automotive industry, due to the large volumes of components and materials that were sourced in that country."

Daniel Dumke insists that one of the best ways to "understand the global connectiveness" of supply chains is to visually map them. ["Solution to Strategic Supply Chain Mapping," Supply Chain Risk Management, 23 April 2012] Dumke reviews an article by M. Theodore Farris II entitled "Solutions to strategic chain mapping issues" that was published in the International Journal of Physical Distribution & Logistics Management. In the introduction to that article Farris writes that there are "compelling arguments supporting the benefits of strategically mapping the supply chain." They include:

  1. To link corporate strategy to supply chain strategy.
  2. To catalog and distribute key information for survival in a dynamic environment (in order) to direct the focus of the managers.
  3. To offer a basis for supply chain redesign or modification.
  4. Current channel dynamics can be displayed in a supply chain map.
  5. The process of building the strategic supply chain map, in itself, will help define the perspective of the supply chain integration effort.
  6. Both the process of developing the map and the process of disseminating the map should lead to a common understanding of the supply chain.

Dumke points out that "there are obstacles preventing an effective supply chain mapping. One is ... the complexity of the supply chain. Even with only a few echelons in focus the number of entities and connections just explodes." Considering how complex most supply chains are, it is little wonder that understanding them is a barrier to better risk management. Technology can certainly help get the connections right, but as Brown's and Dumke's comments imply, the job of mapping supply chains is neither easy nor quick. Dumke's article contains a number of maps used in Farris' article and a quick glimpse is enough to convince anyone of both the complexity of the process and its usefulness. Dumke provides some of the lessons learned from Farris' article. They include:

"• Utilize geovisualization techniques -- The mapping efforts utilized a geovisual technique combining weighted solid and dashed arrows and lines, defined symbology representing different trading relationships, and the representation of financial flow to develop maps rich in content."

Remember, the purpose of the maps that Dumke is discussing is to provide understanding by taking advantage of visualization. Getting into the nitty-gritty details of the supply chain is best left to analytical techniques that take advantage of other technologies. Mapping, however, is a good start to any such effort.

"• Start at a higher level -- It is highly unlikely a company would be able to, or would desire to, expend the resources required to map 100 per cent of all of their customers and suppliers. Each mapping effort must determine the economic trade-off between the level of detail of their map, the cost to gather the detail, and the benefit received. … Owing to the ready access to economic data, an industry macro map may offer the greatest mapping value for a relatively minimal investment. It is recommended that the map designer begin at a high level and then drill down."

The statement that companies probably wouldn't "desire" to map a 100 per cent of their customers and suppliers applies only to visual mapping. Using a technology like Enterra Solutions' Sense, Think/Learn, Act™ system to understand and monitor supply chain connections is (or should be) a highly desirable goal. As I pointed out in a previous post, The Missing Part is Always the Most Important Part, only automated systems capable of gathering and analyzing large amounts of data then displaying pertinent results are capable of providing the kind of visibility necessary to a complex supply chain adequately transparent.

"• Strive to keep the maps strategic -- Strategic supply chain maps must maintain a strategic emphasis, any users with a desire to drill down to an operational level should utilize alternative process-related tools such as the SCOR model. … Keep the strategic supply chain maps at a high, strategic level and avoid undue complexity."

SCOR stands for supply-chain operations reference-model. As defined in Wikipedia, "It is a process reference model developed by the management consulting firm PRTM and endorsed by the Supply-Chain Council (SCC) as the cross-industry de facto standard diagnostic tool for supply chain management. SCOR enables users to address, improve, and communicate supply chain management practices within and between all interested parties in the extended enterprise. SCOR is a management tool, spanning from the supplier's supplier to the customer's customer." In other words, Farris agrees that the nitty-gritty details of the supply are important and must be understood.

"• Manage a synergistic network -- As value chain mapping continues to evolve, map designers may find that the term 'supply chain' is a misnomer. Strategic supply chain maps quickly reflect a 'supply network' as it is not unlikely that a customer’s customer may be a critical supplier’s supplier. Recognition of these types of relationships may have far-reaching strategic impact in terms of keiretsu-type relationships or jointly beneficial marketing efforts."

Farris makes a point that I've made in the past, namely, the term "chain" no longer adequately describes the connectivity involved in today's supply networks. The term has become such a part of our culture and lexicon, however, that I don't think it will (or needs) to change.

"• Embrace mapping creativity -- It was determined there was no single approach to developing a strategic supply chain map. Creating a strategic supply chain map is as much an artistic endeavor as it is a defined process. … It is recommended that firms attempting to strategically map their supply chain embrace this fact by asking multiple individuals who create a map to use the same data set. Each variation may result in components within the map which offer easier readability and should be incorporated into the final map."

Farris' last point is an excellent one. Maps, like other forms of analyzed data, are meant to provide understanding to users. Visualization is a powerful tool for creating understanding. In my business, we worry about dashboards (i.e., intelligent user interfaces) and how analyzed data is presented to decision makers. Information that is hard to use or understand is of little or no value. If you want a better idea of how powerful visualization can be for creating understanding and providing insights, I recommend you that you visit the Gapminder web site. Dumke concludes:

"The resulting supply chain map is overwhelming at first, but which map wouldn’t be. A complex system like a supply chain and its supporting parameters are just hard to zip onto a single page. After a short while of looking at the map I was just amazed how much information could be deduced from it. I think using the lessons learned and (not too many) different information layers in a map can result in highly aggregated and informative results, ergo in a real supply chain map."

With so much at stake, I would think that companies would want to take advantage of every possible tool and technique to help them deal with a growing number of risks to their supply chains. Mapping is simply one of the tools in the kit.

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