Risk of SCM

2005 AMR Research, Inc. | Page 1

AMR Research Market Analytix Study | IT Spending Series

Supply Chain Risk Management:

From Idea to Imperative


Key Observations

Still an art, not a science

Requirements to drive to SCRM performance are coming from

everywhere

No industry is immune to the SCRM Imperative

Key issues include:

The need for a common framework and language

Accountability and ownership

Controls


Outline/Objectives for Presentation

What is Supply Chain Risk Management (SCRM)?

Why Supply Chain Risk Management is Now an Executive Priority

SCRM Quantitative Survey Data Key Findings


Uncertainty increases business risk

Business managers regularly extrapolate from the past to the future but often fail to recognize when conditions are

beginning to change from poor to better or from better to worse.

They tend to identify turning points only after the fact. If they

were better at sensing imminent changes, the abrupt shifts in

profitability that happen so often would never occur. The

prevalence of surprise in the world of business is evidence that

uncertainty is more likely to prevail than mathematical

probability.

The evidence. . .reveals repeated patterns of irrationality, inconsistency and incompetence in the ways human beings

arrive at decisions and choices when faced with uncertainty.

-Peter L. Bernstein, Against the Gods The Remarkable Story of Risk


Supply Chain Risk Management Defined

Risk management is the process of measuring or assessing risk and then developing strategies to manage the

risk. These strategies can involve the transference of risk to

another party, risk avoidance or mitigation, and channel risk

sharing.

SCM risk assessments balance the probability of demand, the likelihood of reliable supply, the most effective allocation of

resources, the probability of success of new product

introductions, market conditions, and the opportunity costs of

alternative decision paths.

-AMR Research, Supply Chain Risk Management Strategies, Part I


Supply Chain Risk and Risk Management Strategies

Demand Demand Supply Supply

Product Product

Revenue management

(Demand Risk)

Social

Responsibility

(Brand Risk)

Intellectual Property

Management (IP Risk)

Sales & Operations

Planning

Network Design for

Agility (Supplier/Logistics

Risk)

Hedging

strategies (Cost

Risk)

Supplier

Development/Supply

Base Monitoring

(Capacity Risk)

Contract Management

(Compliance Risk)

Customer

Rationalization

(Profitability Risk)

-AMR Research, Supply Chain Risk Management Strategies, Part I


Trends driving Supply Chain Risk Management

Business trends and challenges. .

Leaner supply chains

Global sourcing

Higher customer expectations

Complexity and inter-dependency

of supply base

Volatility and variability of demand

Increasing commodity costs and

tighter logistics capacity

. . Punctuted by external events

Enron and Sarbanes-Oxley

9/11 terrorist attack

SARS & Avian Flu threats

Asian Tsunami and hurricanes

Katrina and Rita

High profile business failures and

disruptions


Why supply risk management and hedging strategies could

increase in importance

???

Source: Hot Commodities by Jim Rogers


Businesses are doing something about it

A survey by the Association of Corporate Treasurers and Ernst &

Young, shows that three-quarters of firms now hedge commodity

exposure compared with slightly more than half last year. Also, 80% of

corporate treasurers now track their success in controlling commodity

price risks against 43% last year.

As commodity prices rise, shareholders are increasingly demanding evidence that senior managers have at the minimum

quantified their raw material price risks via internal reviews. The days when you could go to investors and say sorry, we didnt expect this have gone, admits one senior manager. You are supposed to have a precise calculation for the impact of every act of God.

- Commodity hedging alleviates risk factor, Financial Times, October 18, 2005

Take-away: Many early SCRM efforts have focused on financial

measures, with disconnected efforts in finance and supply chain

organizations.


SCRM Adoption: Current deployment

% of Responses. N=89

Q. Which of the following best describes your companys overall use of SCRM?

Top reasons for not using:

Happy with existing process (7 mentions)

Cant prove sufficient qualitative benefits (4)

Cant prove quantitative benefits such as ROI, TCO (3)

Limited budget (3)


Risk Factors: Most potential threat


Q. In your opinion, which category of risk poses the most potential threat to your organization?


Overall Chem. RetailHigh-

TechAuto A&D

Cons.

Goods

Ind./

Discrete

Supplier

Failure1 2 2 2 1 2 2 1

Strategic Risk 2 3 3 1 2 2 - - 3

Natural

Disaster3 1 3 3 - - - - - - 2

Geo-Political

Event4 2 - - 3 4 1 - - - -

Regulatory

Risk5 2 3 - - - - 2 1 - -

Logistics

Failure6 - - 1 - - 3 2 - - 3

IP Infringement 7 3 3 3 - - - - - - 3

Other 8 - - - - - - 4 - - - - - -

Risk Factors: Most potential threat



High tech challenges: Collaboration and the virtual company

Brand

Owner

Contract Manufacturer

WIP

Consigned

material

Raw

material

bought at

lead time

Finished

goods

buffer

Supplier

Raw Material

Brand owner,

3PL, or

customer DC

Finished

Goods

Buffer

Customer

Premium logistics by exception

Virtual Company

Plan Daily Demand Signals

Finished

Goods


High tech challenges: NPI pace & adoption rate accelerates

AM Radio

Telephone

Television

FM Radio

Color TV

Cable TV

VCR

Cordless Phone

Pe

ne

tra

tio

n 0

- 1

00

%

1920s Today

Answering

Machine

CD Player

Mobile Phone

Internet

Satellite TV

Camcorder

PC


However, high tech companies find

themselves making a trade off

High tech supply chain costs are above par compared to other

industries, but perfect order performance is low

Lower supply chain costs are a direct result of outsourcing

manufacturing

Perfect order performance is poor due to a lack of supply and

logistics coordination

Longer distances to overseas contract manufacturing partners are

making the supply network less responsive to volatile demand

Overall supply

chain costs

Perfect order

performance

The high tech industry trade off

Above par *

On par *

Below par *

* As compared to other industries

Source: AMR Research Benchmark Analytix


SCRM Adoption: Current deploymentHigh-Tech cut

% of Responses. N=12 High-Tech companies

Q. Which of the following best describes your companys overall use of SCRM?

Below-average

penetration, higher

interest level


Risk Factors: Most potential threatHigh-tech cut

% of Responses. N=12 High-Tech companies


Pro-active investments in supply assurance/supply risk reduction

Leading edge adoption of hedging strategies tied to procurement

Sensing demand and driving demand insight are critical competencies


Risk Factors: Increasing or decreasing in 2006?


Q. Across your entire supply chain, does your organization believe that the level of SC risk in 2006 is increasing,

staying the same, or decreasing in each of the following areas?


SCRM Adoption: Business drivers

% of respondents with SCRM initiatives. N=70

Q. How important are each of the following business issues in driving your companys SCRM initiatives? (1=not at all important / 10=extremely important)

Not at all important Extremely important

Most important drivers

behind SCRM

investments

(23%)

(14%)

(14%)

(14%)


SCRM Adoption: Performance gaps

% of respondents using SCRM. N=29

Q. How satisfied are you with the success of your SCRM system in addressing these business issues?

(1=not at all satisfied / 10=extremely satisfied)

GAP

-1.2

-1.0

-1.0

-1.4

-1.2

-0.9

-0.9

-1.3

-0.6


SCRM Adoption: Deployment of SCRM components

% of respondents with SCRM initiatives. N=70

Q. Which of the following potential SCRM components do you use today / plan to implement?

49%

47%

47%

46%

45%

44%

41%

41%

39%

38%

37%

37%

36%

% plan to

implement


SCRM Investments: Funding for 2006 initiatives

% of respondents who have SCRM initiatives. N=70

Q. How will your company fund your SCRM initiatives in 2006?


Summary of findings

1. Awareness of SCRM is increasing but is an emerging category

2. There is dedicated funding for SCRM initiatives and spending will

rise

3. S&OP, Inventory Optimization, BI/Analytics tools, Data

Warehousing tools and visibility/event management tools are all

high on the investment priority list

4. Reliability/continuity of supply is consistently the key driver of

SCRM initiatives

5. Discrete manufacturing industries lag in maturity but spending

expectations and SCRM focus are high

6. Retail is mature in some aspects of maturity, but spending

intentions are low



Thank You!

Mark Hillman

Research Director

AMR Research, Inc.

[email protected]

617.350.1730



Appendix Slides


Research Methodology & Respondent Profile

89 web-based interviews conducted in April 2006

Representative sample across the U.S.

Spread across industries:

Process manufacturing = 32 interviews

Discrete manufacturing = 46 interviews

Retail = 11

Company size:


Respondent Profile: Business Industries


Process = 36%

Discrete = 52%

Q. What is your primary business industry?


SC Environment: Biggest blind spot


Q. What is your biggest blind spot in your supply chain?


SCRM Investments: Technology decision makers


Q. Which department within your organization owns the initiative with regards to the purchase of SCRM solutions?

Line of business = 27%


SCRM Investments: 2006 change in spending


Q. How do you expect your SCRM budget to change compared to 2005?

NET CHANGE

+12%

+22%

+1%

+25%

+22%

+21%

-10%


SCRM Investments: 2006 spending


Q. Approximately, how much do you plan to spend on SCRM-related activities in 2006? (includes auditor support

services, software + infrastructure technology, personnel time + materials, business process change, etc.)

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