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The Risks in Supply Chain Management

written by: Ian Johnson•edited by: Elizabeth Wistrom•updated: 5/25/2011

There are several risks to running a supply chain. However, a number of companies are either unaware of these risks, ignore them completely, or believe they aren't serious. There is more to running an efficient supply chain than concentrating on the lowest possible price!

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    What are the inherent risks in supply chain management? What are the main concerns and what must companies do to ensure they protect their interests, lower costs and run an efficient inventory? While these questions are somewhat involved, there are some basic risks that all companies must be cognizant of when running their supply chains. It amounts to understanding these risks and being aware of their dangers.

    When companies assess their supply chain, they often start with the assumption that the lowest possible price on parts and materials is the end-all-be-all solution. While nobody can argue that lower prices are good, there are other approaches to lower costs which may have an impact. In fact, it’s being aware of these other approaches that helps to reduce inventory cost of ownership and points the way to running a more efficient supply chain. Expanding one’s view of supply chain management will provide the impetus to effect change, drive improvement and ultimately, lower costs. So, what are the risks in supply chain management?

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    1. Poor Vendor Management

    The right vendor can make all the difference in a company’s supply chain. They can help lower costs with volume discounts, use contractual supply agreements that help to lower the month to month holding costs of inventory and help to lower freight costs with bulk shipments. However, the wrong vendor can do the exact opposite. Companies must adopt stringent vendor qualification processes that take more into consideration than just price alone. Savings on price can easily be eroded when orders aren’t properly filled, the wrong parts are received, or they arrive damaged due to improper packaging. The best companies have processes involved in qualifying and grading their vendor’s performance in these areas and assess their abilities quarterly.

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    2. High Lead Times & Transit Times

    MorgueFile: dave 

    This is the most recognized issue in supply chain management. Late or delayed parts and materials from vendors mean companies will be late themselves and customers will be upset. Delays are commonplace. They happen all the time for all kinds of reasons. It’s understood that there’ll be some kind of delay at some point. What’s not acceptable is when companies have no recourse to solve those delays. Having multiple approved vendors helps to alleviate this risk. However, taking it a step further is even better. The best run supply chains make sure to have multiple approved vendors and contractual agreements on supply with all of them. The right kind of agreement can ensure companies always have safety stock waiting in case any one particular vendor experiences delivery issues.

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    3. Damaged & Obsolete Parts, Poor Inventory Counting Methods

    Damage to inventory is a complete waste. When parts are damaged to the point where they can no longer be used, there is simply no way to recoup those losses. Obsolete inventory is equally damaging as there are fewer ways to use those parts and fewer customers interested in taking them. However, the worst scenario is when companies don’t know their parts and materials are damaged, and assume the inventory count on those items is good. They either don’t inspect the inventory or don’t properly segregate it. The implications mean a company will only find out they can’t use the parts at the last minute. They’ll then incur huge costs as they try to rush parts in with high expedite fees and high freight costs.

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    4. Poor Quality & High Freight Costs

    MorgueFile: Matthew_hull Perhaps it simply goes without saying that quality should always be a top concern. Companies that base their decision to order on price and price alone often find out the dangers of ignoring a vendor’s quality. They exacerbate the issue by having poor incoming quality control inspections that don’t catch defective parts. However, the biggest issue is when companies ignore the per-unit freight costs on incoming parts and materials. The cost of inventory is far more than just the price of the product. Included in this price is the cost of freight in and out of the warehouse. The higher the freight, the higher the cost of ownership and the less those savings on price make an impact.

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    5. Running the Wrong Supply Chain Approach

    One of the biggest risks in supply chain management is to run a supply chain and inventory approach that is not conducive to the company’s business model, its market or its customers’ order patterns. It happens all the time. Someone reads about how JIT (Just in Time) worked for a large company, and decides to run that system in their own business without first asking if it’s the right fit. Companies that run a successful JIT have linear & constant customer demand, have large volume requirements on parts & materials, and have strong purchasing power that helps to make them their vendors’ number one priority. Companies that have cyclical and infrequent customer demand, smaller purchasing power and are smaller players in terms of volumes should run a Min/Max inventory system, or at the very least, guarantee they have safety stock on obscure parts.

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    Putting it All Together

    Determining the risks in supply chain management involves being aware that cost savings include more than just the purchase price on parts and materials. The lowest possible price isn’t always the best option if those parts arrive late, are poor quality, easily damaged, rarely available or are from an unreliable vendor. The most important aspect of proper supply chain management is to be aware of all the costs of inventory and set plans in motion to reduce their impact. A number of companies use lists of their most pressing concerns and risks in managing their supply chain. They use this list to enact cost cutting plans that focus on analyzing total cost of ownership, and not just purchase price.