A recent Harvard Business Review article by Rene M. Stulz dives into six ways companies mismanage risk (membership required) that are just as applicable to supply chain operations as they are to financial operations. As the article points out, these missteps are just as likely to occur in good economic times as they are in the rough economic times we are currently experiencing, but rough times will magnify the impact of the mistakes considerably.
The six mistakes highlighted in the article are:
- reyling on historical data
Historical data is a starting point, not a destination. For example, look at how well real estate investment managers who assessed risk on the basics of statistics over the past three decades did in 2007. Closer to home, consider how well you would have done in your fuel hedges in early 2008 (before the price of oil dropped over 60%) or with your logistics hedges in late 2007 (before global shipping volumes were cut in half).
- focussing on narrow measures
Focussing only on-time deliveries misses the point. It’s about the perfect order — the right product of the right quality shipped using the right method with the right carrier at the right price delivered to the right customer at the right time. If you ship the wrong product, or the quality is insufficient, or you have to expedite it and it costs three times as much, you’re losing money and your metric will never capture the losses.
- overlooking knowable risks
Meticulous review and careful thought allows one to identify almost every possible risk, including risks in the instruments used to measure the risk. For example, if you are using an index to hedge against cost increases, and that index lags reality by three months, you could be cut off-guard by rapid cost increases or decreases due to unexpected supply or demand disruptions (caused by natural disasters, for example).
- overlooking concealed risks
Risk takers in your organization may deliberately hide risks that they feel are unlikely, and jeopardize an entire sourcing plan or production line. For example, if you’re in food, and your supply manager decides to source all of your tomato crop from coastal Florida because of volume-based cost savings, you’re at risk of an immediate supply disruption every time a hurricane sweeps up the cost.
- failing to communicate
If you can’t clearly explain the risks in your plan, systems, and organization, chances are they’ll be ignored, or at least severely underestimated. For example, if you’re assuming uninterrupted supply from a single-source supplier, and that risk goes overlooked, that could be a real problem in this economy.
- not managing in real time
Unless you’ve been hiding under a rock in a cave, you’ve probably noticed the volatility of the global markets lately, including supply volatility (as suppliers go out of business) and demand volatility (as customers reduce their spending).
All these mistakes will cost your dearly in the current economic climate, so its worthwhile reviewing your risk management strategy to make sure you haven’t made any of them. For more information on risk management, and best practices, see the risk management posts.