Much of what happens from day to day is clearly out of our control, from a dead cell phone battery in the midst of a crucial call to a 20-car pile-up between you and the deal of a lifetime.

Business leaders, however, must be prepared for uncontrollable events of a much larger scale. Fire could destroy a vendor's factory, a storm could disrupt key transportation routes, strikes could cripple supplier production—anything could happen, and the onus is on you to plan for it. Accurate and timely supply chain management and demand chain management decisions are critical. Predictions for unit demand, capacity requirements, material prices, competitor actions and customer behaviors drive companies every day.

As part of my research I often have the opportunity to interface with various industry analysts. Regarding supply chain management, AMR Research senior analyst Mark Hillman points out that diligence is imperative in supply chain management. "I've been in this field for eight or nine years, and I can tell you that in the last few years, the supply chain is an area where people spend a lot of time planning."

Hillman cites the avian flu scare as an example. "The avian flu might be a red herring, but you have to consider these questions: What if half the employees in manufacturing don't show up due to illness? What if the port of China shuts down?"

And have you considered the challenges good news can bring? "Say a customer increases sales orders by 40 percent," poses Hillman. "Can your supplier satisfy your orders? And what kind of competition is out there? Who else requires the same parts and merchandise you need? That's where business audits come into play. Planning for one contingency gets you thinking about all the other things a company can do to ameliorate risk."

In supply chain risk management, planning means making sure the products you sell are always available, from the supplier and manufacturer right down to the consumer. "Once upon a time it was difficult to create a demand profile," says Hillman. "There is now a new breed of tools that combines the traditional tools of supply chain management with the ability to apply probabilistic techniques to deploy and assess different inventory strategies. These tools allow companies to maximize both profitability and efficiency."

Despite efforts to keep ahead, the range of supply chain risks continues to grow. As Hillman observes, "Now, more than ever, the world is a very interconnected place globally—environmental disaster, any disruption of logistics, whether it be supplier shortfall or transportation—all companies need to be thinking about these things."

Add in tax implications and the rising cost of oil, and you arrive at a whole new round of supply questions, not the least of which is: Should we bring our manufacturing closer to home? But Hillman cautions, "Making a decision to better meet capacity may negatively impact the supply chain somewhere else along the line."

Managers must assess their models continuously to stay on course and in business. To that end, businesses generally have three common goals:

Constantly monitor the supply chain for signals that predict problems

Promote timely and precise decision making when problems arise

Model what may happen

Transparency required
Companies can also succeed in managing their supply chains through proactive supply chain monitoring. The introduction of international compliance regulations mandates companies to maintain transparency at every level. These reporting requirements mean thorough audits of suppliers everywhere. "This is an interesting challenge for companies, and a growing trend," says Hillman. Many manufacturers get their supplies from international sources outside of their own country. "This raises the question: If a product fails, who is responsible?"

But the bigger problem of global supply chain management is simply the nature of the beast. Two very basic issues confronting global companies are matching supply to demand and addressing disruptions in supply chain activity. "If you look at your expected demand profile, it goes without saying that you are going to need the goods to supply that demand," Hillman says.

As an example, the Taiwan earthquake of September 1999 reverberated through the semiconductor market for more than a year after the fact. "You always need to ask yourself where you are going to source from," Hillman says. "If it's not avian flu, SARS [Severe Acute Respiratory Syndrome] or a tsunami, there is likely going to be something that will negatively impact your supply chain. That's a part of thinking about global risk." Hillman adds that companies also need to consider whether there is anything about their networks they can change to reduce their chances of loss.

The issue of compliance means companies are now responsible for understanding their supply chains and conducting audits of suppliers to guarantee that they, too, meet all compliance standards. "Consequently," Hillman adds, "companies are pushing whatever product requirements they need to meet upstream to suppliers.

"It's not just financial, either. Products supplied to manufacturers must also meet safety standards. Once you meet safety standards, there's the issue of differentiation," says Hillman. "Manufacturers need to provide their customers with a competitive edge—performance that is the best ever, bar none."

Another way to mitigate supply risk is to forward-buy supply. A forward contract is an agreement between a buyer and a seller calling for delivery of a specified amount of a specified asset at a specified future date. It is also an agreement on a specific price for the commodity.

Ready for anything
It's a fickle, unpredictable world in which we live. Companies need to mitigate the risk in the supply chain management the best they can, but as Hillman points out, "Optimization in one area of your supply chain may create global suboptimization in another."

Network design tools are available that help top-line managers assess dependencies and risks inherent in their supply network and identify opportunities for risk pooling and alternate sourcing. The bottom line: Organizations need to be ready for anything, and incorporating a supply chain risk management plan is the key to a sound and productive enterprise. T

Ron Swift is vice president of cross-industry solutions marketing for Teradata.

� Teradata Magazine-September 2006