Supply Chain Risk Management:

From Idea to Imperative

2005 AMR Research, Inc. | Page 1

AMR Research Market Analytix Study | IT Spending

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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 2

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 3

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 4

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 5

Supply Chain Risk and Risk Management Strategies

Network Design for
Agility (Supplier/Logistics
Risk)

Demand
Customer
Rationalization
(Profitability Risk)

Revenue management
(Demand Risk)

Supply

Contract Management
(Compliance Risk)

Sales & Operations

Planning

Social
Responsibility
(Brand Risk)
Hedging
strategies (Cost
Risk)

Supplier
Development/Supply
Base Monitoring
(Capacity Risk)

Product
Intellectual Property
Management (IP Risk)

2005 AMR Research, Inc. | Page 6

-AMR Research, Supply Chain Risk Management Strategies, Part I

Trends driving Supply Chain Risk Management

Business trends and challenges. . . . Punctuted by external events
Leaner supply chains

Enron and Sarbanes-Oxley

Global sourcing

9/11 terrorist attack

Higher customer expectations

SARS & Avian Flu threats

Complexity and inter-dependency

of supply base

Asian Tsunami and hurricanes

Katrina and Rita

Volatility and variability of demand

High profile business failures and

disruptions

Increasing commodity costs and

tighter logistics capacity
2005 AMR Research, Inc. | Page 7

Why supply risk management and hedging strategies could

increase in importance

???

2005 AMR Research, Inc. | Page 8

Source: Hot Commodities by Jim Rogers

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

AMR Research,chain
Inc. | Page 9
measures, with disconnected efforts in finance and 2005
supply
organizations.

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)
2005 AMR Research, Inc. | Page 10
Cant prove quantitative
benefits such
as ROI, TCO (3)

Limited budget (3)

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 11

Risk Factors: Most potential threat

Q. In your opinion, which category of risk poses the most potential threat to your organization?

Overall

Chem.

Retail

HighTech

Auto

A&D

Cons.
Goods

Ind./
Discrete

Supplier
Failure

Strategic Risk

--

Natural
Disaster

--

--

--

Geo-Political
Event

--

--

--

Regulatory
Risk

--

--

--

Logistics
Failure

--

--

--

IP Infringement

--

--

--

Other

--

--

--

--2005 AMR Research,

- - Inc. | Page 12 - -

High tech challenges: Collaboration and the virtual company

Brand
Owner

Plan Daily

Demand Signals

Virtual Company
Customer

Contract Manufacturer
Consigned
material
Raw
material
bought at
lead time

Finished
goods
buffer

Premium logistics by exception

Finished
Goods

WIP

Supplier
Raw Material

Brand owner,
3PL, or
customer DC
Finished 2005 AMR Research, Inc. | Page 13
Goods
Buffer

0 - 100%

High tech challenges: NPI pace & adoption rate accelerates

Color TV

VCR
Cordless Phone
Answering
Machine

AM Radio

Penetration

Telephone

FM Radio

CD Player
Mobile Phone
PC

Television
Cable TV

Camcorder
Internet
Satellite TV
2005 AMR Research, Inc. | Page 14

Today

1920s

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

The high tech industry trade off

Overall supply
chain costs

Above par *
On par *

Perfect order
performance

2005 AMR Research, Inc. | Page 15

Below par *

* As compared to other industries

Source: AMR Research Benchmark Analytix

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 16

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
2005 AMR Research, Inc. | Page 17
insight are critical competencies

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 18

SCRM Adoption: Business drivers

% of respondents with SCRM initiatives. N=70
Q. How important are each of the following business issues in driving your company s SCRM initiatives? Most important drivers
(1=not at all important / 10=extremely important)
behind SCRM
investments
(23%)

(14%)

(14%)

(14%)

2005 AMR Research, Inc. | Page 19

Not at all important

Extremely important

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
2005 AMR Research, Inc. | Page 20

-0.6

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?
% plan to
implement
49%
47%
47%
46%
45%

44%
41%
41%
39%
38%
37%
2005 AMR Research, Inc. | Page 21

37%
36%

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 22

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 23

Thank You!

Mark Hillman
Research Director
AMR Research, Inc.
mhillman@amrresearch.com
617.350.1730

AMR Research Market Analytix Study | IT Spending

Series

2005 AMR Research, Inc. | Page 24

Appendix Slides

2005 AMR Research, Inc. | Page 25

AMR Research Market Analytix Study | IT Spending

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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:
<5000 employees = 33% of sample
5000-14,999 employees = 27% of sample
15,000+ employees = 40% of sample
Respondents were qualified based on active involvement in their
companys purchase of Supply Chain software

2005 AMR Research, Inc. | Page 26

Respondent Profile: Business Industries

% of Responses. N=89
Q. What is your primary business industry?

Process = 36%

Discrete = 52%

2005 AMR Research, Inc. | Page 27

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 28

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 29

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%
2005 AMR Research, Inc. | Page 30

-10%

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.)

2005 AMR Research, Inc. | Page 31