Don’t Run from Risk — Plan for It

Disruptions are risks in every company’s supply and transportation chains. Some are simple, day-to-day concerns while others have global impact—like the natural disaster that devastated Japan last year. While it is neither feasible nor realistic to completely eliminate all supply chain disruptions, risk can be effectively mitigated with the right technology and processes.

Today’s leading companies are challenging conventional methods of doing business and are striving to address risk at all levels on an ongoing basis. The following illustrates four examples of how organizations can adopt the strategic combination of process and technology to prepare for and mitigate transportation risk as an area of continuous improvement.

Design as a Process

There is an old saying: Plan for the worst and hope for the best. This premise epitomizes one of the first and most common approaches to mitigating risk, which is simply to plan for it. Many companies leverage network design and tactical transportation modeling solutions to plan for challenges, whether that means alternative sources of supply in the case of a natural disaster or anticipating the ebbing of available transportation capacity and how that might affect the usage mix between a private fleet and commercial freight. The difference, however, between practice adoption and best-in-class is one of frequency.

Best-in-class organizations not only embrace proactive network and tactical transportation design, but they also take that notion beyond the traditional practice of treating it as a one-time problem-solving or annual event. They maximize risk mitigation effectiveness by enabling it as an ongoing, continuous process and by designating network design as an established, staffed function within their organizations.

When correctly implemented, network design as a full-time function is cost-justified based on the associated risk averted, money saved and efficiencies gained. It also provides two distinct benefits. The first benefit is the ability to dynamically adapt strategies as supply chains evolve. This is a critical capability since supply chains are rarely static. The second benefit is the ability to anticipate and act ahead of emerging trends, particularly trends known to be cyclical, such as capacity availability and fuel price fluctuation.

Procurement beyond Price

Transportation capacity availability and service-level consistency are two other examples of risk that organizations must continuously address. Factor in a challenging economy that impacts carrier solvency risk, and these issues become magnified.

Transportation procurement is an especially interesting process due to the variation that exists beyond price and service delivery. Many factors must be considered when procuring a rate between two points, including the equipment being used, whether or not and how much capacity is being committed, agreed upon service levels, additional costs such as fuel or accessorial charges, and even the travel direction since pricing from point A to point B can be different than from point B to point A.

This level of variation necessitates an explicit representation of the network in order to properly analyze all risk aspects. Organizations that focus solely on overall transportation cost leave themselves vulnerable to the inevitability of risk by failing to consider other risk-contributing factors affecting their transportation chains.

Advanced transportation procurement technology helps companies combat these risks by delivering the ability to model an improved representation of the network and perform comprehensive what-if analysis. Modeling the network with sufficient granularity enables systematic analysis of the potential tradeoffs—or costs—between mitigating the risk associated with each or some combination of variables, and the price of the service. When examining strategies to effectively mitigate risk, a company must concurrently consider the cost impacts of the associated mitigation options and evaluate their worth accordingly to arrive at the best option for that particular organization’s business.

To ensure that it is covered from a capacity perspective, a company might negotiate capacity with three carriers on each lane. That approach can get expensive, however, and cost the company in lost volume-rate discounts.

The highest-cost but safest option would be to engage three carriers deep on every lane, while the least expensive but also least secure option would be to engage a single carrier per lane. The “right” option for the company is often somewhere in between the two extremes.

If the company has certain lanes that are high-volume or key-customer lanes, then it may be worth incurring the additional cost of having the multiple back-up carriers on those lanes. Conversely, the extra cost might not be justified on low-volume lanes. Conducting optimization analysis to represent the network enables the company to examine that low-level detail and identify valuable tradeoffs to arrive at the right mix that fits its business.

Collaboration with Partners

Another granular form of risk is lack of visibility within a supply or transportation chain. A common example of lack of information or interaction occurs around inbound shipping processes from suppliers. While a company knows what order it placed, it often does not have insight into what the supplier’s inventory is, when the goods will ship or if they will be short-shipped.

Traditional electronic signals such as Advance Ship Notices (ASN) are typically sent only after the goods are in transit, thus limiting a company’s ability to proactively adjust or replan if something goes wrong. The impact of these risks on the company’s supply chain might manifest as not receiving required materials at its factory, not receiving the consignment of goods it needs for its distribution center, or a short-shipped truck that is now only half-full and that could have been fully utilized had the expected full truckload been shipped.

Lack of visibility also poses a threat in the operational realm. A company might not have insight on a day-to-day or week-to-week basis into supplier information affecting the orders it places, such as the supplier’s capacity or how the supplier schedules appointments for the ordered loads. If the shipper does not share in-transit detail, the company will likely not know in enough time to notify its own customers in the event of a delay with the supplier’s truck or other issues.

The ability to share these signals and gain needed visibility requires both technology and processes that enable partner collaboration and communication. With these two elements in place, suppliers can let companies know immediately what they are going to ship and when so the company can plan the transport around it.

By providing carriers with the mechanism to share capacity and other details and by enabling them to interact with the dock scheduling process, companies are able to see exactly when each carrier will arrive at the dock and ensure that carriers are not scheduling concurrent appointments that cause inefficient wait times. With the ability to receive status updates regarding when trucks are in transit as well as revised estimated times of arrival, companies can react quickly and proactively to increase performance and service.

Closed-Loop Processes

Leveraging closed-loop processes as part of a continuous improvement paradigm is another strategy in mitigating risk. While companies might track the occurrence of a disruption within the supply or transportation chain, they commonly do not have the ability to capture why the disruption happened.

Being able to record the reasons behind a disruption enables this feedback to be used as inputs into subsequent processes, such as procurement or supply chain design. Results of network risk mitigation, what-if and other analysis can be leveraged as information in the organization’s transportation management and other systems. These capabilities enable a company to help ensure that it can effectively put its plans into practice and redirect when necessary based on new information and events to minimize disruptions and overall risk.

Conclusion

While potential supply chain risks cannot be avoided entirely, leading companies are taking a new approach to risk management and optimization. By leveraging a combination of technology and best-practice processes, these companies are effectively examining risk across all aspects to strategically mitigate interruptions in their supply and transportation chains.