Supply Chain Meets Risk Analysis

Wall Street's hedging and risk-management techniques now can be applied to help manufacturers optimize capacity and sourcing decisions. Vivecon Corp. last week added two applications to its Supply Chain Risk Management suite: Strategic Component Supply Manager, which quantifies risks and helps manufacturers develop hedges against unpredictable swings in demand, and Tooling and Capacity Manager, which assesses likely demand for a product and monitors market acceptance.

Agilent Technologies Inc., a high-tech manufacturer of capital equipment for the electronics industry, is an early adopter of the products. "We are the poster child for demand uncertainty," says Chuck VanDam, supply-chain engineering manager at Agilent. "It's a natural thing for us to be interested in supply-chain risk and flexibility management."

Vivecon's software marks the first time that financial risk analysis has been implemented in the supply chain, says Noha Tohamy, principal analyst of enterprise applications at Forrester Research. The software presents a range of demand scenarios and with each option assigns a probability of risk, then comes up with recommended planning and procurement scenarios based on these options.

That's important to Agilent, which a few years ago worked on a 56-week lead time for supplies for its chip- and board-testing hardware. That meant that it had to place orders to suppliers far in advance of actual demand. Not only did the long lead time create problems for getting products to customers on time, resulting in lost revenue and market share, but the company also got clobbered when the downturn in the industry hit, and it was left with inventory carrying costs, VanDam says.

With the software, Agilent can analyze a contract that guarantees a certain range of supply against potential demand. Says VanDam, "The software helps us decide how much we should pay for that flexibility."