Our article Key Capabilities of S&OP for your Supply Chain outlines multiple powerful ways that the S&OP process can increase corporate profitability through strategic use of operational resources. Risk management is a vital component of successful S&OP implementation.
Risk Identification for a better risk management
Risks may appear differently in supply chain planning verses in financial planning. Supply chain planning risks are usually based on the accuracy of underlying assumptions like whether forecasted demand is accurate or whether production will hit expected levels because the plant is successfully running without unscheduled downtime.
Financial planning risks may result from currency fluctuations, cash flow shortages, or unfavorable customer payment terms, among other issues.
Severity (Impact) Assessment
Missed orders provide a good example of the possible severe impact of failing to meet S&OP plan expectations. If the supply chain plan misses the mark, orders for critical customers could be late or incomplete. This could result in both a loss of business and a harm to the corporation’s reputation. It can also, unnecessarily, give your company’s competition a chance to “get their foot in the door” by having their product qualified as a suitable replacement to your product. Years of sales and technical development work can be squandered when orders are missed.
If the finance department was counting on the revenue stream from the lost business, then they will not be able to meet their revenue forecasts.
Other consequences of a breakdown in the planning process include; elevated labor costs due to unscheduled overtime and increased shipping costs for expedited shipments.
For all team members involved in the planning process; it is important to distinguish between events that we can control versus events that cannot be controlled. Controllable events include planning for manufacturing shutdowns, accurately capturing customer demand and launching a sale or promotional event to drive up customer demand. Uncontrollable events include natural disasters, component shortages, and labor strikes.
Your team should construct a process to facilitate discussion among key team members. That would then help assess the likelihood of controlled and uncontrolled events.
“What if” scenario planning enables your team to model the impact of unanticipated disruptions to the plan. We can use the results of contingency planning to develop a mitigation plan.
Risk Management & Mitigation Planning
Finally, it is important for your team to make plans that can be put into action should unlikely events occur. For example, qualifying multiple raw material suppliers provides companies with alternatives; if one supplier suffers a natural disaster or an industrial accident that curtails their normal production rates.