In this blog post, I’d like to address a critical issue that many executives face when considering transformative approaches in their supply chains—risk aversion bias. This bias, often underestimated, can significantly hinder the implementation of innovative solutions like Demand-Driven Material Requirements Planning (DDMRP), even when the potential benefits are substantial.

A Real-Life Scenario

I once had a discussion with the Vice President of Supply Chain at a major pharmaceutical company. His perspective was quite revealing and highlights the essence of risk aversion. He openly admitted: “Our supply chain sucks. It really does. But you know what? The supply chains of all my competitors suck exactly as well.” This statement underscores a prevalent mindset. He was satisfied with his supply chain performing equally, or just marginally better, than his competitors’. The critical question then arises: Why take the risk of trying something new?

Understanding Risk Aversion Bias

Risk aversion bias is a well-documented phenomenon where individuals weigh the potential risks of a course of action much higher than the potential benefits. Surprisingly, it doesn’t matter if the risk is real or merely perceived.

Let’s consider a scenario where you are the VP of a global supply chain tasked with improving overall performance. With inventory days too high, service levels below standard, customers complaining, and the company losing sales, you have two options on your table:

1. Transform Your Supply Chain with a Demand-Driven Operating Model (DDMRP)

• Benefits: You can achieve a step-change improvement in your supply chain performance, potentially becoming the hero of the day.
• Perceived Risks: If the transformation fails, you could be blamed for stepping out of the mainstream, which could jeopardise your career.

2. Stick to Industry Standard Solutions (IBP, Advanced Planning and Scheduling Tools, maybe with some AI thrown in as well)

• Benefits: You’ll likely see some marginal improvements in supply chain performance, performing as well as your competitors or slightly better (not much better – if you are doing the same things like everyone else, you can’t expect that).
• Risks: If the implementation fails and there’s no significant improvement, you can still claim adherence to industry standards and best-in-class processes. The blame, in this case, is diffused, because every company is in the same boat.

Most executives find no incentive to try something that breaks traditional rules if it’s perceived as a risk, even if the upside could be massive. Instead, they prefer standard approaches that promise safer, albeit marginal, improvements.

Setting the Record Straight on DDMRP

However, it’s important to get the facts right. The actual risk that DDMRP will worsen your supply chain performance is zero. Case studies reveal that even amateurish implementations of DDMRP have yielded positive results, sometimes even massive gains. So, if there are any perceived risks, consider conducting a small pilot project. This requires a minimal investment and involves very little risk but offers a potentially huge upside.

In conclusion, risk aversion bias can significantly impede supply chain innovation. While the safer, traditional routes might seem like the best choice, they can limit the potential for significant improvements. It’s crucial for executives to weigh their options carefully and consider taking calculated risks where the benefits could far outweigh the perceived dangers.

Enjoy your day and consider embracing the power of innovation in your supply chain!