Lec 11 Risk Measurement Reliability & Validity.pptx

Lec 11 Risk Measurement Reliability & Validity.pptx

1. Supply Chain Risk Management Lec-11 - Risk Management Reliability & Validity

2. RISK MEASUREMENT VALIDITY AND RELIABILITY A basic concept whenever measurement plays a central role in any model or system is to ask a simple question: “Is the measure or model valid and reliable ?” Valid means that an indicator or model measures what it is supposed to measure. If we had to replace the word valid with another word, that word would be accurate. If a supplier measure indicates a supplier is high risk, is it really a higher risk compared with other suppliers? Lec 11: SCRM 2

3. RISK MEASUREMENT VALIDITY AND RELIABILITY A second important dimension of a risk measure is reliability . Reliability is the extent to which a measure provides results that are consistent from use to use. A watch could measure time (it has validity), but it could be inaccurate as its battery wears down. Or , the same piece of equipment used to measure blood pressure is not reliable if it gives different readings when no real change in a person’s blood pressure occurred. Something that is reliable means that we have confidence in its use time and time again. Lec 11: SCRM 3

4. WHAT IS RELIABILITY IN SUPPLY CHAIN MANAGEMENT ? Reliability in supply chain management means consistently meeting customer demands and delivering products and services on time, in the right quantities, and at expected levels of quality. Essential for maintaining good relationships with customers and meeting their expectations. A reliable supply chain is efficient, responsive to changes in demand, and able to respond quickly to disruptions. It’s also resilient – able to withstand unexpected increases or decreases in orders without causing the business any problems. Lec 11: SCRM 4

5. HOW TO ACHIEVE SUPPLY CHAIN RELIABILITY Consider the five initiatives mentioned below for the success of supply chain management (SCM ). Build A Strong Relationship With Key Partners  : Working with your supply chain partners can integrate processes and strategic development. Working with trusted partners to build relationships based on trust and cooperation Provide information exchange and other benefits that improve quality, reduce costs, and increase efficiency. Lec 11: SCRM 5

6. HOW TO ACHIEVE SUPPLY CHAIN RELIABILITY 2. Analyze What’s Working  : A supply chain process map can help you identify problem areas and improve partner performance—an essential part of any annual review. The map is based on a yearly review geared toward identifying ways to improve performance, including sales, marketing, logistics, and production. Lec 11: SCRM 6

7. HOW TO ACHIEVE SUPPLY CHAIN RELIABILITY 3. Cost Control  : To stay competitive and ensure your company’s strength, it’s crucial to understand the origins of your raw materials and collaborate with partners to lower supply costs. With a dynamic global market and evolving trade agreements, manufacturers must factor in the effects of these changes on their expansion plans, including location and distribution points Lec 11: SCRM 7

8. HOW TO ACHIEVE SUPPLY CHAIN RELIABILITY 4. Establish Clear Communication With Supply Chain Partners  : Collect data throughout your supply chain by collaborating with partners at every stage. Your data should include conventional information, such as volumes, weights, origins, waste levels, maintenance information, and scheduled downtime. This data provides insights into cost reduction and customer satisfaction—all critical pieces of the puzzle regarding strategic planning. Make sure you’re able to share information and communicate with your partners wherever you are so that you can prevent costly disruptions. With the right technology tools, tracking and reporting on your progress is easier than ever .   Lec 11: SCRM 8

9. HOW TO ACHIEVE SUPPLY CHAIN RELIABILITY 5. Continuously Monitor & Expand Your Supply Chain  : For small and mid-sized businesses looking to grow, purchasing comprehensive business systems can help them develop relationships with suppliers and partners, develop new products, and maintain a sustainable business .  Lec 11: SCRM 9

10. SUPPLIER PERFORMANCE MEASUREMENT— DOING IT RIGHT Companies use different sort of supplier performance measurement system. M easurement systems supplier scorecards. Focus is not a how-to on supplier performance measurement but to address the issues that tend to affect supplier measurement systems at most companies. Purpose is assessing whether a supplier performance measurement system is likely to satisfy its intended use. Measuring performance incorrectly is an invitation to trouble, and we all know that trouble and risk are best friends. Lec 11: SCRM 10

11. Characteristics of an Effective Supplier Measurement System The measurement system allows scoring flexibility so all performance categories and suppliers are not measured the same way. Internal customers evaluate supplier performance through an online portal that feeds information directly to the measurement system. Performance reports are forwarded electronically to suppliers with review and acknowledgment required by executive supplier management. Each location at a supplier receives an operational performance report while the supplier’s corporate office receives a “relationship” performance report . Supplier performance reports include total cost measures wherever possible instead of price measures . Supplier performance, particularly cost, quality, and delivery, is updated in real time as transactions occur. Lec 11: SCRM 11

12. Characteristics of an Effective Supplier Measurement System The measurement system separates critical suppliers from marginally important suppliers . The supplier measurement database allows user flexibility when retrieving and displaying data. The measurement system provides early-warning performance alerts such as predicted late deliveries from suppliers. Suppliers have the ability to view their performance online with comparisons against other suppliers. The measurement system is regularly compared against best-practice companies . Real performance improvement can be demonstrated as a result of the measurement system. Lec 11: SCRM 12

13. QUANTIFIED RISK INDEXES This approach scores risk events or suppliers using algorithms that model risk. Risk indexes are quantitative models that consider multiple factors to arrive at a single risk indicator score. These indexes consider more than simply a supplier’s financial status when arriving at a risk score. To date most risk indexes or indicators have been internally developed since third parties have been slow to respond with new tools and approaches, something that will likely change. Lec 11: SCRM 13

14. A RISK INDEXES EXAMPLE Consider the following example, which is a technique used by a food manufacturer to develop risk indexes to support its risk management efforts . This company examines specific risks from three dimensions: severity of the risk, the probability of the risk occurring, and the probability of early risk detection. This approach is consistent with the FMEA (failure modes and effects analysis) approach, a widely used quality management technique that considers these three factors. Let’s look at an example : Lec 11: SCRM 14

15. A RISK INDEXES EXAMPLE Consider the following example, which is a technique used by a food manufacturer to develop risk indexes to support its risk management efforts . This company examines specific risks from three dimensions: severity of the risk, the probability of the risk occurring, and the probability of early risk detection. This approach is consistent with the FMEA (failure modes and effects analysis) approach, a widely used quality management technique that considers these three factors. Let’s look at an example : Lec 11: SCRM 15

16. A RISK INDEXES EXAMPLE Companies that use this approach identify, evaluate, and then rate all possible risks, which are then addressed in terms of priority. As mentioned, with any risk index we must be concerned about its validity. Here, what defines the incremental values in each scale (i.e., low to high is a broad range with a great deal in between)? Is the incremental difference between a score of 3 and 4 in a scale the same as between 5 and 6 or 8 and 9? Should the three categories be equally weighted, which is the case here? Would three people looking independently at the same risk arrive at the same or similar score using this tool? ( This is called inter-rater reliability). Too many companies use tools such as the one presented here without fully performing the up-front work necessary to validate the tool. The virtue of this approach is its simplicity. It is easy to understand and use. Lec 11: SCRM 16

17. Supply Chain Key Performance Indicators These are not predictive measures—they do not provide warning about pending or specific risk events. Rather, they provide insight into how well some important business processes are operating . Forecast Accuracy Concept-to-Customer Cycle Time Order-to-Cash Cycle Time Perfect Order Rate Return on Assets Lec 11: SCRM 17

18. Supply Chain Key Performance Indicators Forecast Accuracy: Companies track and assign accountability for forecasting success to an executive steering committee. Companies regularly measure forecast accuracy across their different products. Forecast accuracy should be computed regularly and compared against pre established benchmarks. T echniques for assessing forecast accuracy, including mean forecast error, bias, mean absolute deviation, mean absolute percent error and tracking signals. All of these techniques compare actual demand against forecasted demand with the difference between these two figures considered error Lec 11: SCRM 18

19. Supply Chain Key Performance Indicators 2. Concept-to-Customer Cycle Time Product development leaders rely on an important time-based metric called concept-to-customer (C-to-C) cycle time. This metric reflects the time it takes to develop new products as well as acting as a target that no single functional group can unilaterally attain . Positive results achieved through collaboration of C-to-C during product development efforts. This shows that the linkage between strategic risk exposure and new product development success (or failure) is strong Lec 11: SCRM 19

20. Supply Chain Key Performance Indicators These are not predictive measures—they do not provide warning about pending or specific risk events. Rather, they provide insight into how well some important business processes are operating . Forecast Accuracy Concept-to-Customer Cycle Time Order-to-Cash Cycle Time Perfect Order Rate Return on Assets Lec 11: SCRM 20

21. Supply Chain Key Performance Indicators 3. Order-to-Cash Cycle Time: An important part of any supply chain is the customer order fulfillment process. The order-to-cash cycle involves the steps from acquisition of a customer’s order to receiving payment from a customer. Order fulfillment focuses mainly on the acts of distribution and logistics. This involves order preparation, transmission, entry, order filling (which may include production and purchasing), billing, shipping, tracking, and returns. Companies that take a broader view of order fulfillment extend their perspective to include the management of accounts receivable, making order-to-cash cycle time a key performance indicator Lec 11: SCRM 21

22. Supply Chain Key Performance Indicators 4. Perfect Order Rate : The perfect order metric is a mathematic composite of multiple factors. The perfect order is one that is delivered on time, complete (all ordered items are in the shipment), damage free, accurate (correct items and quantities), with proper documentation. Perfect orders not only drive customer loyalty for the product and producer, but they also lead to greater supply chain efficiency and reduced investments in inventory. To date the primary users of the perfect order metric have been consumer packaged goods companies. Any Company can use a perfect order measure if they can overcome the humbling nature of this metric. Lec 11: SCRM 22

23. Supply Chain Key Performance Indicators Lec 11: SCRM 23

24. Supply Chain Key Performance Indicators 5. Return on Assets: If there is one higher-level measure that tells how well a supply chain is performing, return on assets is that measure. It include a numerator that includes income and a denominator that looks at assets. S upply chain problems, including the consequences of any risk events, will show up in the numerator and/or denominator of this metric. Company uses return on assets as its primary way to measure the performance of its business units. Lec 11: SCRM 24