Single Multi-Tier Risk Mitigation Strategies Don’t Mitigate Risk

Last year we penned a post on how single tier risk mitigation strategies don’t mitigate risk and that they may, in fact, increase risk. As we indicated in our previous post, the following standard single-tier risk mitigation strategies have the potential to increase risk:

    • Dual Sourcing
      without careful planning, both suppliers could use the same Tier 2 source
    • Alternate Design
      can simply reduce / eliminate the need for one rare raw material in favour of another material that ends up being more rare
  • Financial Risk Monitoring
    for shakey suppliers isn’t enough to catch production shortcuts that a supplier might be taking to cut costs that increase your risk when the product is used or sold
  • Replacement Product Lines
    can share parts and suppliers that actually increase risk from a disruption

We indicated that if you wanted to truly mitigate risk, you have to go multi-tier and work with your supplier to identify the most likely risks in their, and your, supply chain and how to mitigate them.

And this is a great start, but simply using the least risky supplier at each tier doesn’t help you if a random natural or man-made disaster takes out a supplier for a few months (or permanently). There needs to be a dual sourcing strategy, and a well planned one. Using two suppliers in the same region or that use the same raw material source is not dual sourcing. Alternate design that is specific to a small supply base that could be wiped out with a single disaster or single market event is not sound alternate design. Financial risk monitoring using third parties that don’t have deep insight into certain markets, regions, or mining operations is not enough — by the time an issue is detected, it could be too late. And of course, trading one product line with known risks for another with unknown risks is pretty much the opposite of risk mitigation.

That’s why you not only need multi-tier risk mitigation in a single supply chain, but multiple supply chains with multi-tier risk for any critical products or product lines. As per our recent post on how the risk disconnect is still big, Sourcing and Procurement need to place a much bigger focus on risk to ensure negotiated scenarios are actual scenarios to realize the savings and value the organization expects.