Managing supply chain risk
according to a market analyst. One way of doing this would be to
think of inventories as a liability and manage it as a risk.
This new way of thinking comes as pressure on manufacturers and retailers to increase efficiencies in the supply chain grows. In the past, companies responded by reducing inventories, shrinking cycle times, or shifting inventory burdens through consignment programmes.
But in a recent report, AMR Research claims that it is not enough just to manage delivery performance through inventory positioning and cycle time reductions. Manufacturers need to adopt new risk management practices - combined with supply chain transparency - to increase the Return on Investment (ROI) on inventory and gain competitive advantage.
One factor for this is that manufacturing today is often outsourced, and Original Equipment Manufacturers (OEMs) often retain sourcing relationships with the critical component suppliers. They may have purchase commitments and volume guarantees with the component suppliers, and these financial arrangements will have a risk cost if the demand does not materialise.
OEMs that do not have a direct sourcing relationship with the component suppliers will have a Contract Manufacturer (CM) procure the material on their behalf. The OEM in this case must ensure that the procurement activity is closely tied to its demand signal, and that it does not generate additional unseen liabilities.
If the demand drops, the OEM may be responsible for the excess inventories at the CM. If demand rises, and the CM's procurement activity fails to cover it, the OEM may incur penalties from its customers. In any case, OEMs need visibility into the inventory and procurement activity of the CM so that they can assess and manage this risk.
Price fluctuation in the market on inbound supply and outbound material, especially when covered under such agreements as above, will pose a financial risk that requires constant monitoring, particularly if commodities or utilities are involved, says AMR.
These scenarios pose significant risk to the financial and supply chain performance of a company. Shifts in market price, market demand, and availability can significantly affect a company's ability to ship product profitably.
As a result, AMR says that applying risk mitigation techniques will improve the ROI. Manufacturers need visibility and assessment tools that can measure and report the risk, and risk-based management techniques to maximise their returns on these investments.
