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Limitations of Supply Chain Network Design Tools for Risk Management

June 27, 2016 | By River Logic

Supply chains continue to increase in complexity as they are leveraged to drive higher value through increased output at lower costs. The more intricate supply chains become, the more difficult (and necessary) it becomes to analyze risks simultaneously.

Risk analysis becomes more difficult as risk visibility decreases and complexity increases. It is quite easy to see risk drivers in simple supply chains, but as additional departments and components are added, risks become obscured.

Despite categorizations that make your supply chain seem like independently run departments, the entire chain is still interconnected, and each division is dependent on all others for overall success. Disruptive events in one area of a supply chain can have damaging effects on other areas if the event is not controlled properly. Even worse, events in your supply chain can disrupt departments outside of your supply chain, like Sales and Marketing.

The probability of extensive damage is significantly increased when these disruptive events occur unexpectedly. While these events can’t always be predicted, advanced planning, forecasting of risk events and adopting a more holistic representation of your business can prepare planners to react quickly and intelligently to mitigate damages.

For these reasons, supply chain network design tools are simply not enough when it comes to risk management. Unfortunately, many such solutions only provide limited insight rather than a holistic view of risk drivers and effective risk management options.

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Departmental Silos and Risk

The creation of divisions and departments within a business can be viewed as an act in specialization. These divisions allow for the focus and development of specific platforms and standards that best serve each department's stated goals while minimizing any risk associated with the pursuance of those goals. There is nothing inherently flawed with this approach, but problems may arise when these departments fail to recognize and understand the interconnectivity they share with other departments within the business.

This creation of ‘departmental silos’ leads to significantly decreased risk visibility. Over time, the autonomy that departments develop will lead to a focus on the protection and safeguarding of their own goals, with limited consideration regarding how other departments may fair given the knowledge they have of likely future events and decisions.

A single, holistic representation of the business is therefore essential — it allows risk analysis that bridges silos that exist within the business. Not only that, it aligns with company-wide goals as opposed to departmental goals, thereby making it infinitely more valuable. A holistic approach will lend insight to the frequently complicated connection between networked assets, while also quantifying systemic risks and developing optimal solutions to those same risks.

To successfully quantify the cost and performance impact of risk scenarios, the interdependencies between risk drivers, asset connectivity, applicable regulations, and shareholder value must be taken into account. Doing so allows risk profiles relating to company assets, operational processes and financials to be represented in a single, integrated model.

Limitations of Network Design Solutions

Many supply chains are leveraging out-of-the-box network design tools to understand and manage risk. However, most network design tools fail to provide a holistic, company-wide risk analysis.

Network design tools generally fall into one of two categories:

    1. Tools that fail to offer a holistic overview of the company's risk profile
    2. Risk management analysis that is overly complicated and requires dedicated developers to manage complicated code.

The first type of offering is problematic because it is ineffective. Any tool that fails to provide a holistic overview of risk with decision logic as described above may cause more problems. Fancy sales terminology will lead businesses to believe that they are effectively quantifying their risk exposure when in reality they are blind to potentially dangerous and disruptive events on a company-wide scale.

While the second type of offering is effective, it is also expensive to build and manage. Dedicated developers are often required to manage custom systems, leaving managers unable to utilize the tool in the absence of the developer.

Outside of these two broad categories, another aspect that many risk management tools fail to incorporate into their analysis is the ability to simultaneously review the impacts of risk events on both financial and operational performance. An useful tool will allow managers to view data in a way that gives them insight into the overall performance of the business, regardless of how that performance is measured.

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Effective Risk Analysis

In the end, implementing a network design tool for risk management is a moot point. Decision makers are unable to understand the systemic impact of their decisions regarding risk, cost, and performance.

Instead, this information must be derived from an integrated business planning tool like the River Logic platform that represents all facets of the business holistically, allowing analysis that bridges any knowledge gaps that exist within departmental silos.

Before choosing a network design tool in the hopes of using it for accurate and efficient risk management, know that such tools will only provide limited visibility into risk. A truly effective risk management tool will help you visualize risk drivers and their effects on all departments within your business, quantified with multiple methods of measuring the ultimate outcomes. Anything less than this, and you may likely leave your business exposed to and unprepared for unforeseen risk events.

River Logic Solution Sheet: Supply Chain Optimization

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