Taking a comprehensive look at the supply chain from an enterprise risk management (ERM) lens suggests a few areas in which risks can likely be mitigated. For example, are all the logistics running smoothly, or is there a propensity in certain parts of the organization to use exception-based and expediting processes as normal ways of doing business? This scenario can be a result of an understaffed, overtasked workforce, with a reduced talent level, and exacerbated by an absence of management guidance, a scenario that has become increasingly common in large companies as a result of the global economic crisis.

Is there risk exposure to not only the bottom 10 percent of your suppliers (those that have the greatest chance of failure or nonperformance) but also the top 10 percent of your suppliers? The suppliers that are reliably performing might substitute your contracts for more favorable terms and higher margin business, now that the economy is rebounding. Company purchasing officers in particular are keen to ensure that market switching does not occur with highly performing suppliers now that they may have new and broadened markets for their products.

What is the impact to market share and brand reputation if one of your suppliers commits some form of social performance mistake?

You can use the Supply Chain Council’s (www.supply-chain.org) Supply Chain Operations Reference (SCOR) model to help identify and create risk categories to better address these and other areas. SAP Supply Chain Performance Management 2.0 integrates with the SAP Risk Management 10.0 application to track the supply chain risks and associate the risks with the SAP Supply Chain Performance Management objectives. The supply chain risk activities created in SAP Risk Management 10.0 are visible to users of SAP Supply Chain Performance Management. Risk activities can be mapped and mitigated in SAP Risk Management 10.0 via SAP Supply Chain Performance Management. This functionality is not available in the previous release.

Using the SCOR Model to Identify Risk Categories

The Supply Chain Council (www.supply-chain.org) offers a framework for defining risk categories and supply chain performance using its SCOR framework. SCOR is a process reference model that the Supply Chain Council developed and endorsed as the cross-industry standard diagnostic tool for supply chain management. SCOR enables users to address, improve, and communicate supply chain management practices within and between all interested parties.

Figure 1 illustrates the supply chain risk perspective (SCRP) based on the findings of the Supply Chain Risk Report (Supply Chain Council, 2008). From this perspective there are a number of dimensions in which supply chain risk may be considered. First, a dimension of supplier risk external to the organization may be considered. According to this framework, these risks come in two forms. Suppler-facing risks focus on the network of supplies, their markets, and their relationships with the organization. Customer-facing risks consider the network of customers, their agents, and intermediaries, the market, and their relationships with the organizations. Another dimension can consider the form of risk as internal-facing risks that look at the organization, the network of resources, assets, processes, products, systems (management and information), and people as well as the overall market environment. These supply chain risks all exist within the global risk environment, underscoring the point that businesses are all connected within their various supply chains.

Figure 1

Supply chain risk perspective (Source: Managing Risk in the Organization Using the SCOR Methodology, Supply Chain Council, 2008)

Inside each of these risks is a number of categories of risk areas. These risk areas can be further broken into specific risk items that can be defined inside of an ERM program for the organization. Risks inside of the supply chain can have multiple dimensions and properties across a global material and human landscape. With so many actors, elements, and participating organizations, it is no wonder that managing supply chain risk can be such a daunting and overwhelming endeavor, especially if the proper solutions and methods are not employed. Even the Dodd–Frank Act, which legislates banking reform, also considers so-called conflict minerals that must be declared if used in the development of commonly used technology and consumer products, such as the ordinary laptop. The supply chain for this is illustrated in Figure 2.

Figure 2

An example of supply chain risk node analysis for a laptop maker (Source: Wikicommons)

When you look at supply chain risk, you can take a number of proactive steps using the available SAP resources and solutions. First, you can use the SAP Risk Management 10.0 environment to create ERM programs and functional risk management activities, and integrate these across the organization. This approach can be used to establish consistent risk categories and key risk indicators (KRIs) that can be applied to both ERM and supply chain activities

One of the more exciting developments is the continual advancement of SAP Supply Chain Performance Management 2.0, which was initially introduced as an enterprise performance management tool specific to supply chain activities. SAP Supply Chain Performance Management 2.0 enables you to load your company information directly from either SAP BusinessObjects BI 4.0 BusinessObjects BIdirectly into SAP Supply Chain Performance Management 2.0 via flat files or other sources. You can compare and contrast these files with benchmark information using industry-standard benchmarks aligned with the SAP Value Engineering offering and the Supply Chain Council SCOR model and framework. The Supply Chain Council took this into account by presenting a Technology Advancement award in 2011 to SAP for the SCPM solution, followed with a Global Supply Chain Excellence award in 2012.

Manage Supply Chain Risks Using SAP Supply Chain Performance Management 2.0

The initial release of SAP Supply Chain Performance Management allowed organizations to perform root-cause analysis inside of SAP Supply Chain Performance Management and align it to financial objectives associated with KPIs associated with the supply chain. With SAP Supply Chain Performance Management 2.0 you can bring KRIs into the fold for a comprehensive view of business performance and risk. In short, the entire ERM space is now integrated, so users receive the best of both worlds: managing supply chain performance and risk mitigation activities.

You can initially begin with predefined ERM program risks in SAP Risk Management 10.0 or create these risks directly from SAP Supply Chain Performance Management 2.0. For now I show you how you can take a risk defined in SAP Risk Management 10.0 and associate it to supply chain activities inside SAP Supply Chain Performance Management 2.0. Figure 3 shows a risk defined as part of a program in SAP Risk Management 10.0.

Figure 3

Risk developed for an inaccurate demand forecast as shown in SAP Risk Management 10.0

As I discussed in my article, “Increase Enterprise Risk Management Performance with SAP BusinessObjects Risk Management 10.0,” this risk can be built using the bow-tie builder risk visualization tool (Figure 4). In this case I look at an example in the food and beverage industry in which an innacurate demand forecast could pose an issue with demand supply planning (and with the corresponding impact to supply chain that is often managed in SAP SCM using the advanced planning and optimization—APO—function). The bow-tie builder can quickly associate risk to an organization, as well as corresponding drivers and outcomes that are managed in SAP Risk Management 10.0 as part of an overall ERM program.

Figure 4

The risk inaccurate demand forecast is assigned to an organization, along with drivers and impacts in SAP Risk Management 10.0

In the SAP Supply Chain Performance Management 2.0 environment, you can look at the scorecard detail using the objectives perspective. In this case you can see a number of performance areas that drive KPIs in the area of supply chain effectiveness. Figure 5 illustrates a number of common objectives that can be selected or created uniquely in the SAP Supply Chain Performance Management 2.0 environment. In this case you select the Improve delivery performance objective, which provides a deeper drill-down into the components of that supply chain objective.

Figure 5

A scorecard view in SAP Supply Chain Performance Management 2.0 from the objectives perspective

As a part of the improve delivery performance objective, you can create a task inside SAP Supply Chain Performance Management 2.0 that can relate back to a previously created risk activity. In this case you can identify an objective Improve Forecast Accuracy (Figure 6) that can be associated back to SAP Risk Management 10.0, if previously defined. Essentially, you create a performance task to reduce risk, which makes perfect sense because KPIs and KRIs fit well together according to supply chain best practices such as the SCOR model.

Figure 6

Create a performance task to Improve Forecast Accuracy is at a Low Risk in SAP Supply Chain Performance Management 2.0 that can be associated with a pre-existing risk identified in SAP Risk Management 10.0

You can also create KPIs and associate risks when you drill into the performance tasks of SAP Supply Chain Performance Management 2.0. Figure 7 shows the KPI perspective from the different performance management tasks across all objectives from the supply chain performance scorecard.

Figure 7

The performance task list from the KPI perspective in SAP Supply Chain Performance Management 2.0

You can select specific tasks and then define performance KPIs, tolerances on KPIs, and corresponding risks. To do this task, select Improve Forecast Accuracy from the task list. In the edit screen for the performance task (Figure 8) you can assign risks from SAP Risk Management 10.0.

Figure 8

The edit screen for performance tasks inside SAP Supply Chain Performance Management 2.0

From the edit window in SAP Supply Chain Performance Management 2.0 you can associate risks, thresholds of risks, performance KPIs, and higher-level objectives. You also can simply edit the description of the performance task. In this case you select a risk category based on the SCOR model to associate with Improve Forecast Accuracy. For this example you identify several risk areas that affect forecast accuracy as well as a number of metrics that are mapped to SAP Supply Chain Performance Management 2.0. You can look at what the current performance is once this data is saved from the main view for Improve Forecast Accuracy, shown in Figure 9. The initial build-up of the performance measure illustrates a fairly major discrepancy outside of the accepted threshold for this performance area. Therefore, you may wish to create a risk activity that can be tracked as part of supply chain risks in SAP Risk Management 10.0.

Figure 9

The main view of performance task Improve Forecast Accuracy after risks and performance metrics are assigned

Select the Selected Risks tab and either the Create Risk or the Mitigate Risk button (Figure 9), the new integration function to SAP Risk Management 10.0 found in SAP Supply Chain Performance Management 2.0. In the previous scenario you assumed that the risk was already created in SAP Risk Management 10.0. If it was not, you could simply select the Create Risk button and then build the risk in SAP Risk Management 10.0 shown in Figure 3. For now you assume this risk is already built and select the Mitigate Risk button to identify the risk mitigation activities that go in concert with removing barriers for supply chain performance.

When you complete this step, your SAP Supply Chain Performance Management 2.0 integration takes you to the Mitigate Risk screen in SAP Risk Management 10.0 to define the mitigation plan to lower the probability of the risk occurring (Figure 10). In this case you create a response to Review Unusual Fluctuations in the weekly forecast, which is based on the example to create an early warning action for the risk Inaccurate Demand Forecast found in Figure 3.

Figure 10

Review Unusual Fluctuations created as a mitigate risk response for the risk Inaccurate Demand Forecast

I believe what you can measure, you can manage. For companies that operate with solutions such as SAP Risk Management 10.0 and SAP Supply Chain Performance Management 2.0, there is a huge upside in terms of visibility and transparency that many organizations have experienced. This visibility and transparency can result in increased financial gain, as well as nonfinancial operational performance, market share, customer satisfaction, and brand reputation. These types of important executive-level results provide confidence in ERM and supply chain management activities to counter some of the frustrations executives have experienced in the market—and in their organizations—over the past two years.

William Newman

William Newman, MBA, CMC is managing principal of Newport Consulting Group, LLC, an SAP partner focused on EPM and GRC solutions. He has over 25 years of experience in the development and management of strategy, process, and technology solutions spanning Fortune 1000, public-sector, midsized and not-for-profit organizations. He is a Certified Management Consultant (CMC) since 1995, qualified trainer by the American Society of Quality (ASQ) since 2000, and a trained Social Fingerprint consultant in social accountability since 2012. William is a recognized ASUG BusinessObjects influencer and a member of SAP’s Influencer Relations program. He holds a BS degree in aerospace engineering from the Henry Samueli School of Engineering and Applied Science at UCLA and an MBA in management and international business from the Conrad L. Hilton School of Management at Loyola Marymount University. He is a member of the adjunct faculty at both Northwood University and the University of Oregon with a focus on management studies and sustainability, respectively.

If you have comments about this article or BI Expert, or would like to submit an article idea, please contact the editor.

You may contact the author at wnewman@newportconsgroup.com.

If you have comments about this article or publication, or would like to submit an article idea, please contact the editor.