Recently, The Center for Supply Chain Research at the Penn State SMEAL College of Business published a report on Supply Chain Risks: Barriers to Manufacturing in Emerging and Developing Markets that reiterated what we’ve known for a while; that 73% of U.S. companies with revenue exceeding $1 Billion experienced supply chain disruptions in the past five years, that 70,000 companies went bankrupt in China in 2008, and that the average American company operating procurement in Asia found that the average company lost 8.2 Million over a three year time span due to illegal bribes and kickbacks.
It also told us that the five main categories of risk are trade, political, geophysical, economic indicator, and operational — and that all of these risks are prominent in emerging and developing markets, which we already knew. It also re-iterated the common mitigation strategies of:
- Building Mitigation into the System via
- Better Network Design
- Supplier Financing
- Multiple Manufacturing Locations
- Monitoring of Public Source Risk Data
- Contingency Plans
- Use Technology Solutions such as
- Scenario Planning
- Visibility and RFID
- Early Warning & Event Monitoring
- Contract Outside Risk Experts
However, in addition to providing a detailed risk analysis of Africa, Asia and the Middle East, China, Latin America, and Eastern Europe, with risk scores for almost 40 individual countries that you should definitely review if you are sourcing from, or planning to source from, any of these areas, it made two very good points that I rarely see in discussions of risk and mitigation.
1. Rank your Risk on probability and significance of the loss.
Face it, unless a low probability risk is associated with a very significant loss, it’s not worth addressing if there are higher probability risks that are more likely to happen.
2. Dollarize the Risk.
Not only will associated hard dollar losses bring about the severity of relative risks, but if you know a risk is pretty much guaranteed to happen in a certain time-frame (for example, a hurricane or earthquake has a 95% probability of affecting your operations in a given 25 year period), you can amortize the cost associated with the impending loss and build a business case for investing in contingency planning and more expensive mitigations that, while costly up front, are guaranteed to significantly reduce your losses over the long term. And, while this is a topic for another post, if you dollarize the risks, the mitigation costs, and the expected loss reductions from the mitigations, you can optimize the application of your limited risk management budget.