This article originally appeared in the September/October issue of PARCEL.
Risk is an inevitable, integral part of business. The big question is, how do you evaluate risk in your supply chain, and what action will best manage or avoid risk all together? Warren Buffet has said, “Risk comes from not knowing what you are doing.” As that relates to supply chain management, we call this visibility. The question then transitions to, “How can I know better what is happening in my supply chain?” Or, in other words, “How can I have better visibility to my supply chain?”
To answer that question, let’s first look at two universal risks in the supply chain today.
The “Amazon Effect”
The most prevalent risk factors to a supply chain have evolved over the past decade. With customers expecting faster and faster deliveries, one of the biggest supply chain risks is not having the product you need when the customer orders it — and not being able to meet your customer’s delivery requirement. The availability and delivery factors have evolved over the last few years due to the “Amazon Effect.” Consumers (and B2B customers) have grown to expect — or demand — both selection and speed largely attributable to the success of Amazon’s business model. Forbes recently published that Amazon not only dominates e-commerce with a 43% share in the US, Amazon also accounts for more than half of the incremental growth of online shopping. So the two risk factors of availability and delivery are only going to grow in significance.
Fortunately, shipping managers are very good at understanding and mitigating the risk of availability and delivery. Oftentimes, they are avoiding this risk altogether through higher product costs or shipping costs. That’s because it’s a bigger sin to not have the product than it is to overpay for it.
The Slow-Drip Profit Leak
Some risk factors have an immediate effect, like a supplier bankruptcy or a widespread weather delay. However, the risks surrounding lack of availability or delayed delivery typically cause a slow-drip profit leak rather than a one-time, large cost. While this makes the risk easier to tolerate, it also makes it more difficult to identify. Over time, the total cost of this approach can be staggering.
To manage availability risk, many companies will implement rules to make sure that they don’t run out of product. They will buy only from a certain supplier because there’s never been a problem getting the product. Or they will always use the same carrier to deliver the freight because they’ve never had a delivery problem with that carrier. Once these rules are in place, companies believe the risk has been mitigated and often lose sight of the total cost of these rules or whether there is a better way.
Under the slow-drip profit leak scenario, these costs become embedded, and inefficient approaches take root. The we’ve-always-done-it-this-way mentality tends to reduce or completely erode innovation. And lack of innovation eventually introduces a new risk level to not only the supply chain, but the whole business.
Tools That Can Mitigate Risk
Knowing what is happening to your supply chain is the best way to evaluate – and avoid – risk. Shippers need to gain complete visibility and look at their total supply chain. To obtain an objective picture of what’s really happening, they need to have clean, standardized data. The data should provide both the real cost of the product, and it should also include the freight cost.
Logistics software can help a shipper gain the clean, standardized data. The software should offer robust analytics to make the data actionable. One of the biggest red flags that I see is when shippers use software that doesn’t have transparency or clear actions that should be taken by the shipper. For example, do you have software that displays a map of all of your shipments, or does the software provide an alert predicting when a shipment will be late and whether the shipment contains a key product for an important customer? Sometimes the flashy software masks its lack of intelligence and actionable data.
Another important element in addressing availability and delivery risk is to become a Shipper of Choice. This allows a shipper to mitigate risk and change the conversation with their carrier. Using the actionable data from the logistics software, the shipper and carrier now can have more objective, data-driven discussions that focus on diagnosing the issues, developing a strategy, and deploying a winning strategy. With a clear view of your supply chain, you will know what is happening and what actions to take.
Shannon Vaillancourt is the president and founder of RateLinx, a customized global logistics software and consulting firm with the only software and process to standardize carrier, shipment, track & trace and order data into one dataset. He is a frequent speaker and contributing author regarding the use of data in logistics management. Visit www.ratelinx.com for more information.