Metrics to Manage Risk in Supply Chains

Today’s business environment is increasingly complex and ever-evolving leading to results in sourcing, production, and fulfillment. This problem has pushed companies to invest more time and resources into predictive analytics that can help them alleviate this changing landscape.

Predictive analytics is a process that uses certain predefined metrics to gather data and identify improvements about a given process. Analyzing these chunks of data to churn out actionable insights, provides one to gain visibility within that process and make improvements to the existing operational schedule.

Having predictive analytics, allows the company to monitor certain risk factors (micro or macro) that can disrupt or severely break down their operational efficiency. The first step to measure these factors is identifying and understanding what kind of metrics you should be tracking.

Practices across suppliers in a given region

Many companies in the Western Hemisphere follow the JIT (Just in Time) approach when it comes to managing their inventory. This approach is very common as it reduces the burden on the cash flow and overall bottom line. However, JIT does cause delays and issues with the entire logistic and fulfillment process. This reliance on JIT combined with the lack of knowledge of the supplier’s region creates uncertainty when it comes to expectations and fulfillment. There are many more common issues that need to be considered such as – Regional Holidays, Internal Production schedules, Timezones, openness to technology that affect your delay risk metric. Understanding and localizing the operational landscape to fit within the supplier region is integral to having an efficient supply and flow of goods.

Lead time

Lead time, one of the key metrics in supply chain management, can be defined as the time duration between when a PO is placed to replenish products and when the actual order arrives in the designated warehouse. Lead times typically fluctuate a lot and are directly proportional to the number of suppliers involved. As more supplier participants are involved in the chain, the longer the lead time turns out to be. When the demand for a given product or item increases – suppliers have more work to be fulfilled which in turn has a fly-on effect on all orders and their corresponding lead times. With today’s global landscape in perspective, lead times are super long so it’s integral that companies have a baked-in cushion that acts as a buffer to get their goods delivered on time.

PO Management and its impact

There are three items on a given PO that wields a significant level of impact on the production line of a company. Incoterms, The shipping method, and the payment terms. Incoterms are a set of recognized laws that govern the responsibilities between sellers and buyers. This is essentially THE line item that defines who is the party responsible for paying and managing the entire shipment, documentation, customs process, insurance, and other logistics. These terms are different across different vendors and regions opening up the buyer to absorb different risks across every stage of a shipment. These terms combined with different payment terms across regions, force companies to absorb high levels of risk without any guarantee on on-time delivery. The method of shipping should also not be overlooked as different modes of transport cost differently, but also have an impact on lead time and are susceptible to macro-economic factors happening across the world.

Streamlined comms across suppliers

Is there an open communication channel with your suppliers? Are all PO’s being accepted and thoroughly acknowledged by the factories? There needs to be a clear channel of communication so that updates can be shared and timelines can be acknowledged. The lack of history in this relation can also be a barrier to suppliers, as there is no data to make any form of prediction. Therefore, it is very important to constantly check in with suppliers, define clear payment terms and understand basic lead times. From the jump, companies need to proactively analyze their supplier’s patterns and address red flags right away. 

Days before estimated ship date

This next metric is simple but is often the source of delay. For example, if your supplier has a posted lead time of 2 months, and you issue an order which needs to be shipped out in 30 days, you would be certain to expect delays. The only way you can cut corners in this is by having a strong relationship with the designated supplier enabling them to start your work before other orders. Understanding the flexibility with a given supplier is important to take into consideration before dealing with ship dates.

The application of these metrics allows one to dive deep into risk analysis rather than focus on routine tracking. This is a continuous process that helps one to understand the fundamental factors that affect their supply chain and define ways to drive operational excellence. Supply chain systems like the GRID, force through a deeper impact through predictive analytics and shed light on the interconnectedness of supply chain metrics in order to optimize every part of the supply chain from start to finish.