2005 AMR Research, Inc. | Page 1
AMR Research Market Analytix Study | IT Spending Series
Supply Chain Risk Management:
From Idea to Imperative
2005 AMR Research, Inc. | Page 2
Key Observations
Still an art, not a science
Requirements to drive to SCRM performance are coming from
everywhere
No industry is immune to the SCRM Imperative
Key issues include:
The need for a common framework and language
Accountability and ownership
Controls
2005 AMR Research, Inc. | Page 3
Outline/Objectives for Presentation
What is Supply Chain Risk Management (SCRM)?
Why Supply Chain Risk Management is Now an Executive Priority
SCRM Quantitative Survey Data Key Findings
2005 AMR Research, Inc. | Page 4
Uncertainty increases business risk
Business managers regularly extrapolate from the past to the future but often fail to recognize when conditions are
beginning to change from poor to better or from better to worse.
They tend to identify turning points only after the fact. If they
were better at sensing imminent changes, the abrupt shifts in
profitability that happen so often would never occur. The
prevalence of surprise in the world of business is evidence that
uncertainty is more likely to prevail than mathematical
probability.
The evidence. . .reveals repeated patterns of irrationality, inconsistency and incompetence in the ways human beings
arrive at decisions and choices when faced with uncertainty.
-Peter L. Bernstein, Against the Gods The Remarkable Story of Risk
2005 AMR Research, Inc. | Page 5
Supply Chain Risk Management Defined
Risk management is the process of measuring or assessing risk and then developing strategies to manage the
risk. These strategies can involve the transference of risk to
another party, risk avoidance or mitigation, and channel risk
sharing.
SCM risk assessments balance the probability of demand, the likelihood of reliable supply, the most effective allocation of
resources, the probability of success of new product
introductions, market conditions, and the opportunity costs of
alternative decision paths.
-AMR Research, Supply Chain Risk Management Strategies, Part I
2005 AMR Research, Inc. | Page 6
Supply Chain Risk and Risk Management Strategies
Demand Demand Supply Supply
Product Product
Revenue management
(Demand Risk)
Social
Responsibility
(Brand Risk)
Intellectual Property
Management (IP Risk)
Sales & Operations
Planning
Network Design for
Agility (Supplier/Logistics
Risk)
Hedging
strategies (Cost
Risk)
Supplier
Development/Supply
Base Monitoring
(Capacity Risk)
Contract Management
(Compliance Risk)
Customer
Rationalization
(Profitability Risk)
-AMR Research, Supply Chain Risk Management Strategies, Part I
2005 AMR Research, Inc. | Page 7
Trends driving Supply Chain Risk Management
Business trends and challenges. .
Leaner supply chains
Global sourcing
Higher customer expectations
Complexity and inter-dependency
of supply base
Volatility and variability of demand
Increasing commodity costs and
tighter logistics capacity
. . Punctuted by external events
Enron and Sarbanes-Oxley
9/11 terrorist attack
SARS & Avian Flu threats
Asian Tsunami and hurricanes
Katrina and Rita
High profile business failures and
disruptions
2005 AMR Research, Inc. | Page 8
Why supply risk management and hedging strategies could
increase in importance
???
Source: Hot Commodities by Jim Rogers
2005 AMR Research, Inc. | Page 9
Businesses are doing something about it
A survey by the Association of Corporate Treasurers and Ernst &
Young, shows that three-quarters of firms now hedge commodity
exposure compared with slightly more than half last year. Also, 80% of
corporate treasurers now track their success in controlling commodity
price risks against 43% last year.
As commodity prices rise, shareholders are increasingly demanding evidence that senior managers have at the minimum
quantified their raw material price risks via internal reviews. The days when you could go to investors and say sorry, we didnt expect this have gone, admits one senior manager. You are supposed to have a precise calculation for the impact of every act of God.
- Commodity hedging alleviates risk factor, Financial Times, October 18, 2005
Take-away: Many early SCRM efforts have focused on financial
measures, with disconnected efforts in finance and supply chain
organizations.
2005 AMR Research, Inc. | Page 10
SCRM Adoption: Current deployment
% of Responses. N=89
Q. Which of the following best describes your companys overall use of SCRM?
Top reasons for not using:
Happy with existing process (7 mentions)
Cant prove sufficient qualitative benefits (4)
Cant prove quantitative benefits such as ROI, TCO (3)
Limited budget (3)
2005 AMR Research, Inc. | Page 11
Risk Factors: Most potential threat
% of Responses. N=89
Q. In your opinion, which category of risk poses the most potential threat to your organization?
2005 AMR Research, Inc. | Page 12
Overall Chem. RetailHigh-
TechAuto A&D
Cons.
Goods
Ind./
Discrete
Supplier
Failure1 2 2 2 1 2 2 1
Strategic Risk 2 3 3 1 2 2 - - 3
Natural
Disaster3 1 3 3 - - - - - - 2
Geo-Political
Event4 2 - - 3 4 1 - - - -
Regulatory
Risk5 2 3 - - - - 2 1 - -
Logistics
Failure6 - - 1 - - 3 2 - - 3
IP Infringement 7 3 3 3 - - - - - - 3
Other 8 - - - - - - 4 - - - - - -
Risk Factors: Most potential threat
Q. In your opinion, which category of risk poses the most potential threat to your organization?
2005 AMR Research, Inc. | Page 13
High tech challenges: Collaboration and the virtual company
Brand
Owner
Contract Manufacturer
WIP
Consigned
material
Raw
material
bought at
lead time
Finished
goods
buffer
Supplier
Raw Material
Brand owner,
3PL, or
customer DC
Finished
Goods
Buffer
Customer
Premium logistics by exception
Virtual Company
Plan Daily Demand Signals
Finished
Goods
2005 AMR Research, Inc. | Page 14
High tech challenges: NPI pace & adoption rate accelerates
AM Radio
Telephone
Television
FM Radio
Color TV
Cable TV
VCR
Cordless Phone
Pe
ne
tra
tio
n 0
- 1
00
%
1920s Today
Answering
Machine
CD Player
Mobile Phone
Internet
Satellite TV
Camcorder
PC
2005 AMR Research, Inc. | Page 15
However, high tech companies find
themselves making a trade off
High tech supply chain costs are above par compared to other
industries, but perfect order performance is low
Lower supply chain costs are a direct result of outsourcing
manufacturing
Perfect order performance is poor due to a lack of supply and
logistics coordination
Longer distances to overseas contract manufacturing partners are
making the supply network less responsive to volatile demand
Overall supply
chain costs
Perfect order
performance
The high tech industry trade off
Above par *
On par *
Below par *
* As compared to other industries
Source: AMR Research Benchmark Analytix
2005 AMR Research, Inc. | Page 16
SCRM Adoption: Current deploymentHigh-Tech cut
% of Responses. N=12 High-Tech companies
Q. Which of the following best describes your companys overall use of SCRM?
Below-average
penetration, higher
interest level
2005 AMR Research, Inc. | Page 17
Risk Factors: Most potential threatHigh-tech cut
% of Responses. N=12 High-Tech companies
Q. In your opinion, which category of risk poses the most potential threat to your organization?
Pro-active investments in supply assurance/supply risk reduction
Leading edge adoption of hedging strategies tied to procurement
Sensing demand and driving demand insight are critical competencies
2005 AMR Research, Inc. | Page 18
Risk Factors: Increasing or decreasing in 2006?
% of Responses. N=89
Q. Across your entire supply chain, does your organization believe that the level of SC risk in 2006 is increasing,
staying the same, or decreasing in each of the following areas?
2005 AMR Research, Inc. | Page 19
SCRM Adoption: Business drivers
% of respondents with SCRM initiatives. N=70
Q. How important are each of the following business issues in driving your companys SCRM initiatives? (1=not at all important / 10=extremely important)
Not at all important Extremely important
Most important drivers
behind SCRM
investments
(23%)
(14%)
(14%)
(14%)
2005 AMR Research, Inc. | Page 20
SCRM Adoption: Performance gaps
% of respondents using SCRM. N=29
Q. How satisfied are you with the success of your SCRM system in addressing these business issues?
(1=not at all satisfied / 10=extremely satisfied)
GAP
-1.2
-1.0
-1.0
-1.4
-1.2
-0.9
-0.9
-1.3
-0.6
2005 AMR Research, Inc. | Page 21
SCRM Adoption: Deployment of SCRM components
% of respondents with SCRM initiatives. N=70
Q. Which of the following potential SCRM components do you use today / plan to implement?
49%
47%
47%
46%
45%
44%
41%
41%
39%
38%
37%
37%
36%
% plan to
implement
2005 AMR Research, Inc. | Page 22
SCRM Investments: Funding for 2006 initiatives
% of respondents who have SCRM initiatives. N=70
Q. How will your company fund your SCRM initiatives in 2006?
2005 AMR Research, Inc. | Page 23
Summary of findings
1. Awareness of SCRM is increasing but is an emerging category
2. There is dedicated funding for SCRM initiatives and spending will
rise
3. S&OP, Inventory Optimization, BI/Analytics tools, Data
Warehousing tools and visibility/event management tools are all
high on the investment priority list
4. Reliability/continuity of supply is consistently the key driver of
SCRM initiatives
5. Discrete manufacturing industries lag in maturity but spending
expectations and SCRM focus are high
6. Retail is mature in some aspects of maturity, but spending
intentions are low
2005 AMR Research, Inc. | Page 24
AMR Research Market Analytix Study | IT Spending Series
Thank You!
Mark Hillman
Research Director
AMR Research, Inc.
617.350.1730
2005 AMR Research, Inc. | Page 25
AMR Research Market Analytix Study | IT Spending Series
Appendix Slides
2005 AMR Research, Inc. | Page 26
Research Methodology & Respondent Profile
89 web-based interviews conducted in April 2006
Representative sample across the U.S.
Spread across industries:
Process manufacturing = 32 interviews
Discrete manufacturing = 46 interviews
Retail = 11
Company size:
2005 AMR Research, Inc. | Page 27
Respondent Profile: Business Industries
% of Responses. N=89
Process = 36%
Discrete = 52%
Q. What is your primary business industry?
2005 AMR Research, Inc. | Page 28
SC Environment: Biggest blind spot
% of Responses. N=89
Q. What is your biggest blind spot in your supply chain?
2005 AMR Research, Inc. | Page 29
SCRM Investments: Technology decision makers
% of respondents who have SCRM initiatives. N=70
Q. Which department within your organization owns the initiative with regards to the purchase of SCRM solutions?
Line of business = 27%
2005 AMR Research, Inc. | Page 30
SCRM Investments: 2006 change in spending
% of respondents who have SCRM initiatives. N=70
Q. How do you expect your SCRM budget to change compared to 2005?
NET CHANGE
+12%
+22%
+1%
+25%
+22%
+21%
-10%
2005 AMR Research, Inc. | Page 31
SCRM Investments: 2006 spending
% of respondents who have SCRM initiatives. N=70
Q. Approximately, how much do you plan to spend on SCRM-related activities in 2006? (includes auditor support
services, software + infrastructure technology, personnel time + materials, business process change, etc.)
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