operationsplanning.net risk-based inventory classification alex rivlin operationsplanning.net

OperationsPlanning.net

Risk-based inventory classification

Alex Rivlin OperationsPlanning.net


Supply Chain Risk Management – agenda

Supply Chain Risk Management – de-risking the supply chain

Supply Chain Risk Management – Inventory classification

History – Philips fire Cisco example

History - beyond ABC classification Supplier side risk factors Internal risk factors Customer side risk factors


Supply Chain Risk Management – history and background

2000 2001 2002 2003 2004 2005 2006 20070

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Supply chain risk publications

# of Articles

Supply Chain Risk Management received increasing attention in recent years

Int’l Journal of Information Systems and Supply Chain Management; Supply Chain Risk Management: Literature Review and Future Research http://www.ie.its.ac.id/downloads/publikasi/132125675_909SCRM%20review.pdf

Source : 34 leading publications

1999 – TW earthquake 2000 – dot-com crash 2001 – 9/11 2004 – capacity tightening. 2011 – Japan earthquake

Notable recent events

Risk management areas

Legal Finance Market Technology Supply Chain Inventory


Supply Chain Risk Management – history and backgroundPhilips fire

Philips fab in New Mexico manufactured RF chips for cellphones. Its two customers, Ericsson and Nokia accounted for 40% of production.On March 17, 2000 a small fire hit the facilities. The fire was put out in 15 min. It was clear that the current pipeline wip was damaged

Ericsson and Nokia supply chain groups received note that a small fire occurred at the facilities and shipping will be delayed by appr 3 weeks

Ericsson

March 20

Accepted re-allocation Established daily monitoringEscalated to VP of operations

March 31

Philips realized that extent of the damage is Initiated phone re-design to accept alternative chip“higher then expected” sent RFP to two alternate suppliers to qualify alternate sourceContinued to wait two suppliers responded in 5 days

acquired capacity from alternate suppliers

April 7

Escalated the situation to executives Pressed situation at CEO meetingsReallocated production to Philips plant in Shanghai and EindhovenInitiated re-design

Outcom

e

No capacity was available Emerged as a market leaderDivision 1.6B annual lossLoss of market shareSale to Sony


Supply Chain Risk Management – history and background

Cisco example

Does the company have risk management process in place?• Risk identification scope

– Apply de-risking where it matters – to support key SKU and customers– Identify areas to me monitored– Concentrate on partner's financial strength and contention points in supply chain

» Geographical concentration of manufacturing and distribution– Knowledge of the supplier's supply chain

Proactive resolution:– IT support and analytics to measure impact– Mitigation framework

» Cross training» Second source » Inventory/capacity buffers» Engineering, QA, marketing support to develop alternatives

Fact: team of 8 people was able to de-risk 45% of Cisco sales and sustain multiple bankruptcies in the supply chain.

Gartner, “Case Study: Cisco Addresses Supply Chain Risk Management”, 2010


Supply Chain Risk Management – takeaway

Takeaway

Does the company have risk management process in place• Risk identification – do we know when disaster happened• Resolution:

– Escalation path– IT support and analytics to measure impact– Mitigation framework

» Cross training» Second source » Inventory/capacity buffers» Engineering, QA, marketing support to develop alternatives

Or you invent all of the above after the event?????


Missed schedule Out of stock Limit ability to grow

Supply chain risks: inventory related - classification – types

Levels of risk management Business Continuity Program Crisis management Product resiliency Supply Chain resiliency

Types of risks

Supplier side risks Excess & write-offs Expedite charges Cost of management

Internal risks Drop in demand Cancellations

Push-outs Loss of relationships

Customer side risks

Acknowledge Monitor Prevent

Mitigate

Resolve

Risk management

Goals of risk management Reduce probability of loss of sales Reduce expenses

Cost of material Expedite charges Write offs Management overhead

This session presents Inventory related risk management


Price Operation1 Operation2 Operation3 Sales10 PP -1 Item 1-1-1 150

Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10

Inventory related risks: Sample supply chain

NOTES: Raw materials RM-1 and RM-2 are converted to Item 1 via operation S1. Item1 is combined with subassembly PP-1 or PP-2 to produce Item1-1, Item1-2, Item1-3 via operation S2 The above items are converted to final items Item1-1-1 … Item1-3-4

Sample supply chain

Inventory related risks: controls and prevention Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10

LegendA-item B-item C-item

Supplier side risk: sample supply chain

Sample supply chain

On sales side ABC is assigned by sales volume, on supplier side – by spent

Inventory related risks: controls and prevention Lets consider simple supply chain and identify controls that are required to monitor and minimize inventory related risks



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Supplier side risk : sample supply chain

Sample supply chain

Supplier side risk – PP-3 affects 95% of sales. If supplier delays/cancells/defaults on their commitment...Ensure healthy pipeline; establish second source.

Closer look

Affects 95%Of sales



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Supplier side risk: sample supply chain

Sample supply chain

.

Zoom in

Affects 95%Of sales

We get healthy and reliableProfit. Supplier gets 0.1And has to invest 1.9

PP-2 costs $2. Supplier's fee is $0.01, and parts they need to buy are $1.99... Supplier may not carry enough Inventory to support volume, which affects $20 revenue for the company.

Monitor supplier's inventory and ensure supplier has enough cash to deliver the goods.


Supplier side risk categorization

Goals Ensure optimal cost is contracted, executed, and monitored for opportunities Minimize/prevent supplier's risk Leverage multiple sources for price negotiations Consolidate to increase volume and further improve prices Support company's inventory policies (VMI, etc), support upside market if needed.

Identification of risk items Effect of delay of materials on company's revenue and risk of loss of business Calculate based on BOM Know limited use/C category items that feed in A-items Review supplier's ability to fund their purchases and support volume (monitor supplier's Expense/Revenue ratio) Review supply chain for common exposure to risks (i.e. chip vendors are different, but FAB and Assy facilities are shared)

Preventive measures Build redundancy in new products, know single points of failure, classify A-products

Start with detectionDefine response process (escalation, collaboration with suppliers, onboarding new source, capacity hedging)

Increase visibility: PO commit->Supplier's Stock->Suppliers WIP, Suppliers CapacitySupplier's ABC classificationSupplier's BCP readiness

Qualify multiple sourcesProduct derisking

Source: “Cisco addresses supply chain management”http://www.cisco.com/web/strategy/docs/manufacturing/Cisco_Case_Study_AMR_10-0917.pdf



Item 1-1 Item 1-1-2 10

500 RM -1 Item 1 Item 1-2 Item 1-2-1 10

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Internal risk factors

Sample supply chain

.

Exposure to common risks inside the company

Expedite

Internal company risk factors are: failure to operate, adverse effects that damage inventory, extra chargesBCP process addresses prevention of failure to operate (outside of the scope of our discussion)Adverse effects happen and need to have response process well definedExtra charges arise from sudden changes in demand and supply. SC needs to be flexible to absorb fluctuations: early warning and prevention processes needs to be in place.

Overtime chargesTransportation fees

Miss shipmentsAnd allow competition

To come in

Out of capacityparalyzed


Internal risk categorization

Goal Ensure timely and appropriate response to risk of overstock and supply interruption

Identification of risk items Monitor expedite charges and freight costs Monitor volatile commodities' prices Monitor process quality

Preventive measures

Acknowledge presence of risks Enable design principals for Adaptive Business

Amit S. Mukherjee,The Fire That Changed an Industry: A Case Study on Thriving in a Networked World Financial Times Press, 10/1/2008, http://www.ftpress.com/articles/article.aspx?p=1244469

Embed sense-and-respond capabilities within normal plan-and-execute processes. Adopt strategies that promote collaborative action among network partners. Value and nurture organizational learning. Deploy technologies that enable intelligent adjustment to major environmental shifts.

Review readiness and periodically assess environment Communicate risk status periodically



Item 1-1 Item 1-1-2 10500 RM -1 Item 1

Item 1-2 Item 1-2-1 10Item 1x

Item 1-3 Item 1-3-1 70500 RM -2

Item 1-3-2 60

5 PP -3 Item 1-3-3 60

Item 1-3-4 10


Customer side risk : sample supply chain

Sample supply chain

.

Zoom in

Used by one customer

Our highest runner is usedBy ONE customer and for

ONE design only

Item 1-1-1 : If anything happens with customer's design, our entire WIP can become obsolete.Item 1-3-3 : If anything happens with [our relationships with ] the customer – back end wip will be obsolete


Customer side risk categorization

Goal Prevent excess and write-offs due to sudden drop in demand

Identification of risk items Identification of items sold to a single customer to be used in single design Identification of items sold to a single customer

Preventive measures

Establishing NRE charges for material in WIP Establishing robust liability monitoring Frequent review of liabilities singed by the customer Establishing contractual liabilities with the customer Frequent refresh of forecast and monitoring of forecast realization Monitor amount of material in distribution channels and at contract manufacturers.


Summary

Established practice Supported by reliable process Dedicated to direct attention to right risk areas Includes teams from supplier, company, and customers Well communicated and transparent Has access to senior and executive level management

Summary : Successful risk management is:

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