Daily Archives: January 14, 2007

Real Risk (in the Supply Chain)

As evidenced by the considerable number of posts in my Risk Management category, including my posts on Managing Business Risk and Disaster Recovery Planning, Risk is one of my favorite topics since I believe that with innovative thinking, much can be done to reduce risk and prevent significant disruptions regardless of what form they arise in or how unexpected they are.

I’m not alone in this non-revolutionary form of thinking and it was nice to see the onslaught of risk-related articles in the supply chain media in recent months. Three articles in particular that stood out to me were Line 56′s Managing Global Supply Risk, ISM’s Mitigate Risk, Sustain Supply, and Knowledge @ Wharton’s Flexibility in the Face of Disaster: Managing the Risk of Supply Chain Disruption.

The Line 56 article points out that global sourcing needs a different set of management guidelines, metrics, and skill sets that focus on addressing the five key sources for supply risks, which it defines as:

  • longer lead times
  • quality control is different in each country, if there is control at all
  • financial data on global suppliers can be inaccurate or unavailable
  • cultural differences prevail overseas
  • laws and regulations differ significantly from those in the U.S.

The article offers three sound suggestions for managing global supply risk:

Executive-Level visibility into exposure and dependency
If they see the risk, they’re more likely to provide support and budget for the development and implementation of risk mitigation plans.
Continuous Monitoring of all Suppliers
You want to catch wind of a potential disruption BEFORE it occurs, not after!
Complete, Accurate, Forward-Looking Supplier Information
It’s not just the business you plan on doing with your supplier tomorrow that is important, but the business you plan on doing with them next year. Make sure that they have the capability and sustainability to deliver before signing the contract.

    The ISM article notes that remaining competitive requires mitigating potential risks by understanding supply chain interdependencies and discovering alternative solutions for areas with high exposure. After all, for the past five years a potentially catastrophic event to an organization’s supply chain has occurred and natural disasters, terrorism, and political unrest is not going away.

    The ISM article also points out that the key barrier to addressing risks is the lack of a clear return on investment – executives are not receiving credit for preventing problems, only for leading their organizations to achieve superior financial performance. Senior management needs to understand that superior performance requires plans for sustained financial success, and those plans require both innovation and risk mitigation components. Maybe “amortized expected loss” needs to become part of the annual budget where the loss is the average financial loss experienced by an organization of equivalent size and geographical diversity over the last five years to unforeseen supply chain disruptions and disasters. Then, any plan that can be used to reduce that number could be hailed as a success and managers would be hailed for the risk prevention efforts instead of chastised for not spending more time on sales and marketing or beating up their suppliers for cost concessions (which we all know is a losing strategy in the long term).

    The ISM article also has some good advice on how to identify potential supply chain risks and mitigate their potential impacts:

    • evaluate high-margin, high-revenue products to identify which disruptions would have the greatest financial impact
    • modify the strategic sourcing approach to include risk analysis
    • establish leading indicators to help identify emerging problems
    • conduct supply chain process mapping to understand dependencies and potential causes of a supply chain failure cascade
    • use impact modeling to determine (catastrophic) breakage points or single points of failure (and remove them)

    This brings us to the Knowledge @ Wharton article which notes that experts from BCG and Wharton generally agree that managing supply chain disruptions revolves around two goals: first, to thoroughly understand the potential of identified risks; and second, to increase the capacity of the supply chain — within reasonable limits — to sustain and absorb disruption without serious impact and that risks fall into three main categories: operational contingencies, abrupt discontinuity of supply, and natural hazards.

    In addition to noting that in order to mitigate and manage a disruption risk, you must first understand the vulnerabilities, it presents a multi-step approach to disruption risk management that you can use as an outline to develop your own risk mitigation planning process.

    1. Obtain senior management understanding and approval and set up organizational responsibilities for managing the disruption risk management process.
    2. Identify key processes that are likely to be affected by disruptions and characterize the facilities, assets and human populations that may be affected.
    3. Undertake traditional risk management for each key process to identify vulnerabilities, triggers for these vulnerabilities, likelihood of occurrence, and mitigation and risk transfer activities.
    4. Report on, periodically audit, and conduct management and legal reviews of implementation plans and results on an on-going basis (e.g., of near-miss management and other disruption risks).

    Great companies create supply chains that respond to sudden and unexpected changes by building “Triple-A” supply chains that are agile, adaptable and aligned. Triple-A supply chains satisfy the following Triple-A goals:

    • Agile supply chains respond quickly to sudden changes in supply or demand.
    • Adaptable supply chains adjust supply chain design to accommodate market changes.
    • Aligned supply chains establish incentives for supply chain partners to improve performance of the entire chain.

    Also, for more reading on supply risk management, my original weekend series is still up over on eSourcing Forum. (Introduction, Risks and the Need for Resilience, Managing Risk, and the bonus SI post WisdomNet’s Point of View.)