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Supply Chain Risk Management:
From Idea to Imperative
Mark Hillman
Research Director
AMR Research, Inc.
AMR Research Market Analytix Study | IT Spending Series
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
© 2005 AMR Research, Inc. | Page 2
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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
© 2005 AMR Research, Inc. | Page 3
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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”
© 2005 AMR Research, Inc. | Page 4
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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
© 2005 AMR Research, Inc. | Page 5
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Supply Chain Risk and Risk Management Strategies
Network Design for
Agility (Supplier/Logistics
Risk)
Demand
Customer
Rationalization
(Profitability Risk)
Revenue management
(Demand Risk)
Supply
Contract Management
(Compliance Risk)
Sales & Operations
Planning
Social
Responsibility
(Brand Risk)
Hedging
strategies (Cost
Risk)
Supplier
Development/Supply
Base Monitoring
(Capacity Risk)
Product
Intellectual Property
Management (IP Risk)
© 2005 AMR Research, Inc. | Page 6
-AMR Research, “Supply Chain Risk Management Strategies,” Part I
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Trends driving Supply Chain Risk Management
Business trends and challenges. . . . Punctuted by external events
• Leaner supply chains
• Enron and Sarbanes-Oxley
• Global sourcing
• 9/11 terrorist attack
• Higher customer expectations
• SARS & Avian Flu threats
• Complexity and inter-dependency
of supply base
• Asian Tsunami and hurricanes
Katrina and Rita
• Volatility and variability of demand
• High profile business failures and
disruptions
• Increasing commodity costs and
tighter logistics capacity
© 2005 AMR Research, Inc. | Page 7
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Why supply risk management and hedging strategies could
increase in importance…
???
© 2005 AMR Research, Inc. | Page 8
Source: “Hot Commodities” by Jim Rogers
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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 didn’t 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
AMR Research,chain
Inc. | Page 9
measures, with disconnected efforts in finance and© 2005
supply
organizations.
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SCRM Adoption: Current deployment
% of Responses. N=89
Q. Which of the following best describes your company’s overall use of SCRM?
Top reasons for not using:
Happy with existing process (7 mentions)
Can’t prove sufficient qualitative benefits (4)
Can’t prove quantitative benefits such
© 2005 AMR Research, Inc. | Page 10
as ROI, TCO
(3)
Limited budget (3)
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Risk Factors: Most potential threat
% of Responses. N=89
Q. In your opinion, which category of risk poses the most potential threat to your organization?
© 2005 AMR Research, Inc. | Page 11
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Risk Factors: Most potential threat
Q. In your opinion, which category of risk poses the most potential threat to your organization?
Overall
Chem.
Retail
HighTech
Auto
A&D
Cons.
Goods
Ind./
Discrete
Supplier
Failure
1
2
2
2
1
2
2
1
Strategic Risk
2
3
3
1
2
2
--
3
Natural
Disaster
3
1
3
3
--
--
--
2
Geo-Political
Event
4
2
--
3
4
1
--
--
Regulatory
Risk
5
2
3
--
--
2
1
--
Logistics
Failure
6
--
1
--
3
2
--
3
IP Infringement
7
3
3
3
--
--
--
3
Other
8
--
--
--
4
-©-2005 AMR Research,
- - Inc. | Page 12 - -
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High tech challenges: Collaboration and the virtual company
Brand
Owner
Plan Daily
Demand Signals
Virtual Company
Customer
Contract Manufacturer
Consigned
material
Raw
material
bought at
lead time
Finished
goods
buffer
Premium logistics by exception
Finished
Goods
WIP
Supplier
Raw Material
®
Brand owner,
3PL, or
customer DC
Finished © 2005 AMR Research, Inc. | Page 13
Goods
Buffer
0 - 100%
High tech challenges: NPI pace & adoption rate accelerates
Color TV
VCR
Cordless Phone
Answering
Machine
AM Radio
Penetration
Telephone
FM Radio
CD Player
Mobile Phone
PC
Television
Cable TV
Camcorder
Internet
Satellite TV
© 2005 AMR Research, Inc. | Page 14
1920’s
Today
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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
The high tech industry trade off
Overall supply
chain costs
Above par *
On par *
Perfect order
performance
© 2005 AMR Research, Inc. | Page 15
Below par *
* As compared to other industries
Source: AMR Research Benchmark Analytix
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SCRM Adoption: Current deployment—High-Tech cut
% of Responses. N=12 High-Tech companies
Q. Which of the following best describes your company’s overall use of SCRM?
Below-average
penetration, higher
interest level
®
© 2005 AMR Research, Inc. | Page 16
Risk Factors: Most potential threat—High-tech cut
% of Responses. N=12 High-Tech companies
Q. In your opinion, which category of risk poses the most potential threat to your organization?
• Pro-active investments in supply
assurance/supply risk reduction
• Leading edge adoption of hedging
strategies tied to procurement
• Sensing demand and
driving demand
© 2005 AMR Research, Inc. | Page 17
insight are critical competencies
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Risk Factors: Increasing or decreasing in 2006?
% of Responses. N=89
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?
© 2005 AMR Research, Inc. | Page 18
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SCRM Adoption: Business drivers
% of respondents with SCRM initiatives. N=70
Q. How important are each of the following business issues in driving your company’s SCRM initiatives? Most important drivers
(1=not at all important / 10=extremely important)
behind SCRM
investments
(23%)
(14%)
(14%)
(14%)
© 2005 AMR Research, Inc. | Page 19
Not at all important
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Extremely important
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
© 2005 AMR Research, Inc. | Page 20
-0.6
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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?
% plan to
implement
49%
47%
47%
46%
45%
44%
41%
41%
39%
38%
37%
© 2005 AMR Research, Inc. | Page 21
37%
36%
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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?
© 2005 AMR Research, Inc. | Page 22
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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
© 2005 AMR Research, Inc. | Page 23
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Thank You!
Mark Hillman
Research Director
AMR Research, Inc.
mhillman@amrresearch.com
617.350.1730
AMR Research Market Analytix Study | IT Spending Series
®
Appendix Slides
AMR Research Market Analytix Study | IT Spending Series
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:
• <5000 employees = 33% of sample
• 5000-14,999 employees = 27% of sample
• 15,000+ employees = 40% of sample
• Respondents were qualified based on active involvement in their
company’s purchase of Supply Chain software
© 2005 AMR Research, Inc. | Page 26
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Respondent Profile: Business Industries
% of Responses. N=89
Q. What is your primary business industry?
Process = 36%
Discrete = 52%
© 2005 AMR Research, Inc. | Page 27
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SC Environment: Biggest blind spot
% of Responses. N=89
Q. What is your biggest “blind spot” in your supply chain?
© 2005 AMR Research, Inc. | Page 28
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SCRM Investments: Technology decision makers
% of respondents who have SCRM initiatives. N=70
Q. Which department within your organization owns the initiative with regards to the purchase of SCRM solutions?
Line of business = 27%
© 2005 AMR Research, Inc. | Page 29
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SCRM Investments: 2006 change in spending
% of respondents who have SCRM initiatives. N=70
Q. How do you expect your SCRM budget to change compared to 2005?
NET CHANGE
+12%
+22%
+1%
+25%
+22%
+21%
© 2005 AMR Research, Inc. | Page 30
-10%
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SCRM Investments: 2006 spending
% of respondents who have SCRM initiatives. N=70
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.)
© 2005 AMR Research, Inc. | Page 31
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