Delivering value to your customers hinges on the end-to-end, interdependent supply chain. The scope of this network includes some elements that you command, but it also demands reliance on partner organizations that extend far beyond your direct control. To address this challenge, top-performing supply chains integrate risk management into both their resilience strategies and the regular cadence of their sales and operations planning (S&OP) practices. Superior networks go even further, identifying value at risk to make better decisions and achieve true agility.
What is value at risk?
According to the APICS Supply Chain Council report “Supply Chain Risk and Reward: Measuring Risk in Your Supply Chain,” the concept of value at risk originated in the financial industry. It enables users to calculate a financial portfolio’s range of most- and least-probable gains or losses over time. Plus, one portfolio can be compared with another in order to assess potential risk and reward. For instance, if two portfolios provide the same return, but one is more volatile (showing large swings in value over time), its balance of risk and reward is less favorable.
To illustrate this concept: Suppose your company values both on-time delivery and low cost. If a low-cost supplier has poorer delivery performance than a high-cost supplier, value at risk would enable a thorough comparison to help determine the optimal risk-and-reward balance for both suppliers.
This is no doubt a common example, as many supply chain management professionals work on assessing and selecting the right partners. Indeed, most global companies rely on tiers of suppliers, and changing partners is no longer an easy decision based solely on price. Suppliers today are a source of design, engineering, and complete assemblies, which means that they substantially influence overall cost. The result is a much bigger impact on numerous different margins that are, again, outside of the organization’s direct control.
However, tracking the financial performance of your suppliers can help. A firm’s financial results are leading indicators of operating performance and, thus, valuable early markers of how effectively and efficiently the end-to-end supply chain will be able to serve customers. As author Gregory L. Schlegel, CPIM, Jonah, notes in his book Supply Chain Risk Management: An emerging discipline: “While one end of the supply chain thinks about the financial strength of suppliers, the other end thinks about the financial risk of customers. Effective financial risk management considers both ends of the supply chain.”
Solidifying the whole
Addressing supply chain risk management is not just about being ready for the worst outcomes; rather, the greatest value comes from strengthening overall supply chain capability. With this in mind, consider putting the following items on your next S&OP agenda:
- Review your approach to risk management, and compare it with current practices for supply chain risk management.
- Assess your S&OP maturity. Most experts will put risk management at the second and third steps of capability—usually two or three years into the journey.
- Talk with your procurement colleagues. Learn about the financial health of your suppliers, and discuss how that can be a part of supply reviews for S&OP.
- Examine your supply chain strategies. Use the Supply Chain Operations Reference model to understand where you are today and where you need to be tomorrow. The risk supply chains face is only going to intensify, so start the dialogue about agility now.
S&OP is the process for iterative business planning and execution. Coupling this with supply chain risk management creates an unbeatable combination for success— no matter the external uncertainties your company faces.
Peter Murray, CIRM, is a consultant and practitioner in sales and operations planning, demand planning, and supply chain management. He also served on the APICS board of directors for two years, helped develop the APICS Certified Supply Chain Professional program, and is an active volunteer with the APICS Supply Chain Council and the Institute of Business Forecasting.