Manage Your Supply Chain Risk

Manufacturing Engineering, Mar 2007 by VanderBok, Ray, Sauter, John A, Bryan, Chris, Horan, Jennifer

Unforeseen problems originating deep in the supply chain can disrupt production plans and impose unacceptable costs on an enterprise

Last year, shipments of several weapon systems, including aircraft, were delayed because sub-tier component suppliers failed to meet rules of the Berry Amendment (USC Title 10, Section 2533A), which require specialty metals used on Department of Defense (DoD) products to be smelted in the US or a qualifying country. A ruling by the Defense Contract Management Agency in February, 2006 caused the government to withhold payment on parts made from non-US specialty metals.

This problem affected about a dozen large aerospace contractors suddenly, and involved at least 50 sub-tier suppliers. The contractors and suppliers received numerous stop-ship notices. A speedy solution was not available, because there is no provision to issue retroactive waivers to the Berry Amendment rules. Although not often fully enforced, the Berry Amendment has been on the books for decades. The new ruling was a surprise to the entire defense supply chain. While DoD and industry are working toward an eventual solution, this new ruling caused a profound crisis for aerospace primes and their suppliers.

Manufacturers are quite vulnerable to events in their supply chain that affect both their sub-tier suppliers and their customers. Two important issues are involved: first, changes in the market environment (the defense market in this case) can significantly affect supply chain performance; second, changes in the marketplace, especially those that constrain lower-tier suppliers, are especially problematic because the OEM cannot, with assurance, make adjustments that are needed to quickly react to the market change.

Today, defense systems, like complex commercial systems, are produced by interwoven networks of global suppliers, who serve multiple customers. Analysis shows that 60-85% of weapon-system cost is embedded in the supply chain. But DoD programs typically comprise only a small fraction of the second and third-tier suppliers' business. The result is a defense industry that is highly dependent on its supply chain, but has little leverage to drive its behavior. Lean practices popular in the defense industry reduce lead time and waste, but potentially increase brittleness to surge in demand or disruption. Reduced inventory levels save cost, but can also increase the impact of supply disruptions.

There are many kinds of supply chain risks common to defense supply chains:

* Loss of production capacity or quality and Diminishing Manufacturing Sources and Material Shortages (DMSMS),

* Unstable and/or uncertain customer demand,

* Funding and contract issues, and

* Regulatory requirements.

The root cause of a problem can occur anywhere in the supply chain, but the impact spreads quickly across the extended enterprise.

In addition to raising the cost of a program, supply chain issues are the most common cause of production delivery performance issues. A problem in any sub-tier supplier has the potential to impact a manufacturer's ability to deliver a quality part on time.

Companies concerned about the potential impact of supply chain issues on their business and their customers need to understand their risk exposure. Leading companies are now adopting the best practice of Supply Chain Risk Management (SCRM) to assure that warfighter demands are met should a supply chain problem occur. SCRM applies the techniques of risk management to supply chains. It develops an enterprise view into the risks deep within a supply chain, and gives companies a tool that they can use to identify and manage risks to reduce their potential impact. Effective risk management includes activities for risk identification, risk analysis, risk handling, and risk monitoring.

The unique nature of SCRM lies in the fact that stakeholders and risks are distributed across multiple, highly independent organizations. Consequently, the risk management process should also be distributed across the supply chain.

Proactive discovery and visibility of risks is the key to effective risk management. While it's human nature to avoid exposing potential problems to trading partners, fact-based information-collection tools can make risks visible and facilitate effective mitigation efforts. Project managers will often observe that common risks were effectively managed; it was the unexpected risks that caused the biggest problems.

In practical terms, the most effective approach for addressing supply chain risk is for stakeholders throughout the supply chain to work together to identify potential risks and propose creative solutions. The most effective mitigation strategy for a risk deep within a supply chain might not even involve that particular supplier. These mitigation alternatives are then evaluated through trade studies to select approaches that offer the best value to the organization.

The risk-management process has been adapted from standard DoD risk management practice. Our experience has shown that risk management in supply chains is more difficult and places additional demands on the process. Critical success factors for SCRM require: