The Supply Chain Risk Assessment Your Company Needs to Undertake Immediately

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The pace of operational change in the fashion industry has truly been breathtaking during the decade and a half of the 21st century. From the Go/Go ‘90s as we became a globalized economy to the spending excesses of the 2000’s to today’s cutthroat Internet decade, the business model continues to change.

Now more than ever, a successful model must include supply chain risk management, which at its core optimizes operational performance while minimizing operational vulnerabilities. It analyzes how companies manage everyday and exceptional risks through continuous risk identification, assessment, mitigation and management with the objective of reducing vulnerability and ensuring sustainability.

Efficiency leverages technology and global responsibilities in a customer-focused environment. We give the customer what they want, when they want and at the cost they are prepared to pay for the value they perceive. Vulnerabilities arise from supplier disruptions and customer demand that require managing risk. The fast fashion model, uniquely leveraged by Zara and emulated by several companies, has developed a model that optimizes performance through strategic selection and location of suppliers while minimizing inventory vulnerability through a nearly unmatched capability to respond to customer demand.

As Sourcing Journal’s publisher Edward Hertzman has said, managing the supply chain and its costs “doesn’t mean I source five cents cheaper out of Dhaka than Vietnam. It’s the logistics and the ability to fulfill orders and reduce inventory that’s going to be the key.”

[Read more about supply chain vulnerabilities: This Overlooked Supply Chain Risk Will Plague Businesses Even More in 2017]

The Supply Chain Risk Management Consortium, a group that works to identify, assess, mitigate and manage supply chain risks, has identified seven variables related to balancing performance and risks:

  1. Operational coordination—This requires collaboration between a company and suppliers through aligning the flow of goods from suppliers with the pace of retail sales. Walmart, America’s largest retailer, does this through Vendor Managed Inventory. Using this model, Walmart gives suppliers access to its point of sale data, and with this information, suppliers are responsible for keeping the shelves stocked. They automatically send product based on inventory and sell-throughs. Though this creates risk for suppliers, it also has benefits. First, it helps avoid stock outs and excess inventory, the latter of which results in the need for discounts. Second, it allows greater predictability rather than sales spikes created through promotions. This model allows Walmart to stick to its “Low prices, every day” operational model. “It’s not that sourcing is really driving retailers out of business, but it’s how you source and how you partner… it is called collaboration,” stated John Cheek, CEO of Hong Kong based Esquel Group, at the 2016 Sourcing Journal Summit.
  2. Pull instead of push—Traditionally, we have pushed inventory based on forecasts to optimize unit cost production. Pushing inventory is efficient but risky if the forecasts are wrong and we don’t understand the true cost of inventory from obsolescence, storage and shrinkage. Moving toward pull systems in which we’re reacting to customer demand will impact production efficiency and increase its effectiveness, reducing the risk of excess inventory. (Part two of this article will look closer at Push vs. Pull strategies for inventory management and their impact on supply chain risk.)
  3. Determining operational risk appetite—The degree of risk that an organization is willing to accept or take in pursuit of its objectives is generally not sufficiently addressed. If known by an organization, it can have multiple, even conflicting, perspectives from different departments and even individuals within an organization. The organizational imperative is to balance risk with efficiency.
  4. Supply chain design—Supply chains function in different ways, reflecting product characteristics, customer demand and supplier capabilities. Supply chain design can also include multiple components, enabling product movement through with optimized logistics, facilitating reverse logistics for disposing of or repairing products and reducing obsolescence through mass customization The design should be based on balancing operational performance with operational risk.
  5. Accepting the battle rhythm of Supply Chain Risk Management—The benefit of SCRM is to elevate the importance of risk in managing supply chains, not as a separate standalone aspect, but integral to managing the performance of supply chains. Rather than view risk as an isolated factor with secondary importance to branding, logistics, and supplier selection, SCRM elevates risk management in equal importance with these factors. Fast fashion is profitable when SCRM is in the foreground, not in the background.
  6. Incorporating the 21st Century Supply Chain Maturity Model—The maturity model is comprised of four points which enable a company to move toward success: Identify, Assess, Manage and Mitigate Risk. The key is to use the maturity model to build expertise and knowledge that allows a company to differentiate itself form the competition.
  7. Assessing operational resilience—Resilience refers to the ability to recover from or adjust to misfortune or change, to bounce back from an event, to achieve a stronger state than before a disruption. Determining the value of resilience comes from forecasting the cost and duration of a disruption with actions that reduce both. This cost is measured against the cost of inaction. When the cost to mitigate risk is less than the cost of a disruption, the organization has added another layer of effective risk.

Irvin Varkonyi is a member of the Supply Chain Risk Management Consortium, a group of 19 companies that focus on SCRM education and body-of-knowledge, risk identification, assessment/quantification, mitigation tactics, business continuity planning, enterprise risk management, supply chain cyber threat analysis, supply chain mapping and more. Varkonyi can be reached at ivarkonyi@scopedu.com

Register for the “Risk and Supply Chain Management: Preparedness for the Global Sourcing Fashion Business” event at LIM College on Sept. 12 in New York City here.

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