In the manufacturing industry supply planning is done based on forecasts of demand and prices of raw materials, but predicting these factors is extremely difficult. For this reason it is vital to understand the difference between forecasts and reality, and how this affects management. At the Planning Department of Hitachi Solutions East Japan, Ltd., @RISK Developer Kit is used to perform quantitative evaluation of risk measures such as Value at Risk (VaR) based on profit models and stochastic variables, including factors such as demand, prices, and forex rates.
Risk Management in the Manufacturing Industry
Planning Department Research Division Head Masaru Tezuka talks about risk analysis at Hitachi: “We first introduced @RISK Developer Kit after we learned about the product at a training seminar by Palisade. From our experience we have experienced not only the importance and usefulness of @RISK, but also the excellent training and support available.”
With its headquarters in Sendai City in Miyagi Prefecture, Hitachi Solutions East Japan Ltd. is responsible for data and risk analysis of supply chain management, production, sales and inventory planning and management. They are also responsible for research and development of analytical methods and the creation of new products (including new packages and cloud-based services). For Hitachi, risk management means the analysis and repetition of potential risk factors, identification of risk, prioritization, and follow up action and monitoring.
There are a wide variety of risks in the manufacturing industry, including fluctuating variables such as demand, price, and foreign exchange. For demand fluctuation, for example, the amount of supply (production and procurement) is decided based on demand forecasts. If the forecast is wrong and there is a supply shortage, then the company will miss opportunities to increase sales. If there is too much supply, then there are inventory or disposal costs. Price and currency fluctuations are also important factors for risk management in the manufacturing sector, and the improvement of forecast accuracy through risk analysis is essential to mitigate these risks.
Planning Department Research Division Head, Hitachi Solutions
The Advantages of using @RISK Developer Kit for Risk Analysis
Risk analysis is based on techniques such as the Monte Carlo simulation. @RISK can show the probabilities of each possible result based on a Monte Carlo simulation in a Microsoft Excel spreadsheet model. In this case, however, Hitachi wanted to develop a high level stand-alone GUI (graphical user interface) outside of the spreadsheet environment that could read data from another system, including production, sales, and inventory data sorted by product data and product group data. For this they developed a system using the C++ programming language, and enabled the system to call @RISK’s risk analysis functions.
The ability to incorporate risk analysis functions into another system was the reason Hitachi chose the @RISK Developer Kit. The ability to use the functions without having to use Excel, and incorporating these functions into a stand-alone system are essential to Hitachi Planning. This system enables them to use their own interface to visualize production and inventory conditions, while also incorporating @RISK’s excellent risk analysis functions. Through the use of tornado diagrams, they can understand the effects on profitability based on which product is produced or sold at what time, and observe the overall situation for each product.
Key Actions to Take after Risk Analysis
Based on risk analysis forecasting, Hitachi can put into place a number of actions to deal with these risks. For example, for demand fluctuation risk, by increasing the forecast accuracy the company can measure risk mitigation, decrease lead times, enable small-lot manufacturing, increase the accuracy of supply forecasting, as well as enable other means to reduce the effects of risk.
Dr. Tezuka concludes, “It is crucial to develop strong risk forecasting and risk analysis through all of these methods – it helps influence the actions we can put in place towards risk, such as risk avoidance, impact mitigation, and the preparation of facilities. @RISK is a critical part of that process.”