@ Supply Chain Management


Supply Chain Meets Risk Analysis

In today’s business world, managing the risk that businesses are exposed to on a daily basis is getting the much needed buzz – it’s called supply chain security sometimes and supply chain risk. An article in InformationWeek.com – Supply Chain meets Risk Analysis, highlights one such adoption of risk management techniques for a real world supply chain.

Elena Malykhina is the author of the piece,

Wall Street’s hedging and risk-management techniques now can be applied to help manufacturers optimize capacity and sourcing decisions. Vivecon Corp. last week added two applications to its Supply Chain Risk Management suite: Strategic Component Supply Manager, which quantifies risks and helps manufacturers develop hedges against unpredictable swings in demand, and Tooling and Capacity Manager, which assesses likely demand for a product and monitors market acceptance.

As you can observe in that lead, supply chain security, demand uncertainty (which btw has long been a mainstay of the industrial world) and capacity planning all fall under the purview of supply chain risk – risk management, to be more precise. So is this merely a rehash of a long set of outstanding demands that supply chain practitioners have been looking for a long time.

“We are the poster child for demand uncertainty,” says Chuck VanDam, supply-chain engineering manager at Agilent. “It’s a natural thing for us to be interested in supply-chain risk and flexibility management.”

Who isn’t contending with demand uncertainty these days. Having worked in the semiconductor industry for a few years, I am well aware of the wild swings that companies and foundries operating in this area experience. I also know from first hand experience (though it is now dated being about 5 years old) that companies are rather slow in adjusting to the semiconductor industry cycle and for the most part geared to mass manufacturing. One of the VPs of my firm once remarked during an up-phase that the state of the company was very good with a firm backlog of orders running about 4 months. No prizes for guessing what he said 8 months later!!

Vivecon’s software marks the first time that financial risk analysis has been implemented in the supply chain, says Noha Tohamy, principal analyst of enterprise applications at Forrester Research. The software presents a range of demand scenarios and with each option assigns a probability of risk, then comes up with recommended planning and procurement scenarios based on these options.

To which I must say – you must be kidding me! Has the fellow heard of the burgeoning field of stochastic programming that is gearing to answering precisely these questions? I can believe that the first steps of applying risk management to supply chain risk might be to weight the demand with appropriate probabilities in order to produce to a weighted demand scenario. So what’s so novel about that? Nothing. But is this what financial risk analysis is about?
Perhaps, my intimate knowledge of the semiconductor industry is not that dated at all:

That’s important to Agilent, which a few years ago worked on a 56-week lead time for supplies for its chip- and board-testing hardware. That meant that it had to place orders to suppliers far in advance of actual demand. Not only did the long lead time create problems for getting products to customers on time, resulting in lost revenue and market share, but the company also got clobbered when the downturn in the industry hit, and it was left with inventory carrying costs, VanDam says.

A 56-week lead time? Let me say that again: A 56-week lead time?? You ought to be clobbered regardless of whether the semiconductor industry is in an up-phase or down-phase – you ought to be clobbered when the sun is shining and when the sun is hiding – it doesn’t matter, you ought to be clobbered. I like that song!

With the software, Agilent can analyze a contract that guarantees a certain range of supply against potential demand. Says VanDam, “The software helps us decide how much we should pay for that flexibility.”

Inquiring minds would love to know whether the lead time has changed. Chances are that they haven’t and what’s more I’d even hazard a guess that a little after the implementation of this supply chain risk management software imposed control, they’d start to gravitate upwards. And that is not going to happen even if you adopted supply chain risk management software. I’d make a prediction if I were a betting man that Agilent’s lead time for procurement and inventory carrying costs are about to go up, up and up.

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Category: Supply Chain Management, Supply Chain News


One Response

  1. I have to agree; the use of analytics is not at this point innovation. What would be innovative is if the main decision makers where in fact using the software directly as opposed to receiving direction from highly trained analytics professionals.

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September 2006