Avoiding Risk Management Pitfalls

The Supply Chain Management Review recently posted an excerpt from an article by Jayashankar M. Swaminathan and Brian Tomlin that summarized six common pitfalls and strategies for avoiding them that’s worth a quick look. In How to Avoid the Risk Management Pitfalls, the authors summarized the following pitfalls and their mitigations:

  • Assuming disruptions can only occur when operating at normal strengths.

    Disruptions can occur at any time – even when you are in the process of recovering from a disruption. Human-caused disruptions in your supply base and natural disasters can happen at any time.

  • Assuming yours is the only company affected by a disruption.

    If the disruption is caused by a natural disaster, chances are other suppliers are also affected. For example, if a tsunami wiped out 25% of the cocoa crop along the west coast of Africa, then your back-up supplier is likely to have just as much of a problem meeting your needs as your current supplier and your emergency supply, if attainable, might cost considerably more than you originally planned for.

  • Ignoring the supply risk associated with demand-pooling tactics.

    Demand-pooling strategies might work great under normal circumstances, but they can lead to a false sense of security since they might serve only to understate the seriousness and immediacy of a disruption should one occur.

  • Ignoring demand risk when choosing a supply-continuity tactic.

    Just as you need to factor in supply risk when evaluating demand pooling, you need to factor in demand risk when evaluating supply-continuity because supply-continuity can seriously increase your demand risk. Insuring significant supply can be costly, and if the demand never materializes, this can result in a significant loss.

  • Allowing managers’ risk attitudes and timelines to determine strategy.

    Managers can vary widely in their tolerance for risk, from extremely lax to dangerously intolerant. Furthermore, even if a manager is willing to invest in supply-chain resiliency, a manager’s choice of tactics can be strongly influenced by his tolerance for risk. Good risk management entails having the right strategies in place for each identified risk, whose cost and effort should be dependent on the probability of the risk occurring and the financial damage that could be caused by the risk materializing.

  • Building short-term resiliency at the cost of long-term vulnerability.

    Supply risk management is not effective if only performed as an intermittent activity carried out every few years on an irregular basis. A good risk management strategy today might not be a good risk management strategy tomorrow. As the authors note, you need to be continually vigilant in scanning for changes in your operating environment that may necessitate adjustments to your resiliency strategy.

I summarized some good strategies and tactics to manage demand and compliance risk in this post back in April. Some of the better strategies and tactics include:

  • Supply Buffer Management
  • Cycle Time Reduction Strategies
  • Collaborative Processes
  • On-Going Screening and Quality Control Processes
  • Continual Training
  • Regular Supply Chain Audits

In addition, as I summarized in this post that summarized Aberdeen’s supplier performance and risk management benchmark report, there are a number of enablers that you can implement to improve your risk management program management. These include:

  • Supplier Scorecarding and Reporting
  • Automated Calculation of Key Supplier Performance Metrics
  • System Notification of Performance Issues & Disruption Events
  • Integration with Spend Analysis Tools
  • Reporting of Key Supplier Operational and/or Financial Risks
  • Web-Based Portal for Supplier Self-Registration & Information Maintenance
  • Insurance Solutions