Category Archives: Risk Management

Don’t Exclude Natural Disasters from Continuity Planning

Even though the probability of certain events may only be once every one hundred years, the reality is that they’re going to happen eventually, and now that your supply chain is global, the chances of being affected by a natural disaster, even half a world away, are many times greater than they were even twenty (20) or thirty (30) years ago. Plus, as per this recent article over on the ISM site on being “in the eye of natural disasters”, the Emergency Events Database (EM-DAT), managed by the Centre for Research on Epidemiology of Disasters (CRED), recorded 3,770 natural disasters worldwide recorded between 2000 and 2009 with an economic impact of over $863 Billion. In other words, on average, there are 377 natural disasters a year costing the supply chain 229 Million each — more than enough to bankrupt even your average large company if it is operating on a razor-thin margin and unprepared for the disaster!

You need a plan for major disruptions caused by natural disasters, be they local to your operations or halfway around the world where they are local to your raw material / component / contract manufacturing suppliers. A natural disaster in either location, or anywhere in between along your normal distribution routes, will knock out your supply chain for an indeterminate amount of time. Thus, as suggested by Bernie Hart, an Executive Director of J.P. Morgan, supply management professionals should be assigning weights to specific transactions of components and products in the supply chain and planning appropriately. What-if scenario simulations are imperative for anything with a significant weight, such as high-volume shipments, high-value shipments, customer-critical components or shipments with delivery penalties associated with them. These simulations should include participants throughout the supply chain to ensure a uniform understanding of what is critical for the business, where the key process triggers are and how suppliers will meet your commitments in the event of a mass-scale interruption.

You need to be planning proactively and putting plans in place for contingencies when your operations get knocked out by a natural disaster — especially considering disasters of all types (hurricanes, tsunamis, volcanic eruptions, etc.) seem to be increasing in recent years. You don’t necessarily have to spend money preparing for execution until the need arises, but you have to spend money creating and fleshing out the plans that will allow you to act fast when a disruption does occur. And, as the article suggests, you should invest in the appropriate analysis technologies to help you identify the biggest risks upon which your contingency plans should focus.

The article is very well written and I would suggest you check it out — it also has some good ideas for contingency plan components. If you are unsure where to start, consider bringing in some outside help who are experts at continuity and disaster recovery planning who can bring with them additional benefits. After all, consultants are cheap.

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There’s No Such Thing As Low-Cost Country Outsourcing

The Business Continuity Institute (BCI) recently released the main results of its study across 35 countries that found that 70% of organizations recorded at least one supply chain disruption in 2010. While this is not news, as the statistic has been this high for a few years now, what is news, as highlighted in a “Procurement Leaders summary” is that where businesses have shifted production to low cost countries they are significantly more likely to experience supply chain disruptions, with 83% experiencing disruption. In other words, your chances of a disruption are greater than 4 in 5 if you use low-cost countries! With an average disruption cost exceeding $700,000 ten percent of the time and an average impact on stock price of 9% (source: PWC), there’s nothing low-cost about low-cost country outsourcing once you factor in the losses from the inevitable disruptions!

Then, when you add the fact that 1 in 5 disruptions result in (serious) damage to your brand, you need to ask yourself why so many of you still believe in this fairy-tale. It’s equivalent to looking for the pot of gold at the end of the rainbow. You’re not going to find it.

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Should You Be Sharing the Risk?

A recent article in the Supply Chain Management Review on “procurement risk management: what it takes to be a leader”, which correctly states that risk is part of business, noted that, even though procurement has become a frequent topic in the risk management conversation, few companies are translating their trepidations into formal procurement risk management capabilities. Considering that risks have grown considerably in recent years and that at least 7 in 10 companies will experience a major disruption this year, with almost 9 in 10 experiencing some form of disruption, this is not good. Risk management needs to be front and centre in supply chain planning.

But is that enough? Let’s say you put it front and centre, identify your top ten risks, and outline your risk mitigation and/or recovery plans for each risk. Classic thinking would say you’ve done a great job, but have you? If it’s a natural disaster, you’ve probably done all you can do since it’s an event that no one has any control over. But what if it’s a production line breakdown at a key plant of a sole-source supplier? Have you done everything you can? Maybe there’s nothing you could have done to prevent it, but, chances are, there was something your supplier could have done to prevent it.

And maybe they would have if they had more incentive — which leads me to believe that the leaders identified in the referenced 2009 Accenture Study who insist on risk-sharing clauses and back-to-back contracts might be on to something. If both parties agree to share risks, and the costs associated with such risks, both parties are more likely to be alert to risk signals and to take action before a minor interruption becomes a major disruption. If both parties are serious about risk, it’s the right way to go.

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If You Think Black Swans Aren’t Deadly …

Consider these recent articles about Hannibal, the rogue killer swan who has, to date, brutally murdered 15 and injured at least 22 more swans in his attempts to drown any swan that gets too close.

Why does he do this this? Unknown, but the current theory is that the water, which is brackish, salty, and quite polluted, is the cause.

Moral of the story? Keep your supply chain clean!

Remember, Hannibal is only a white swan. Imagine what the black swan will do to you if he gets you in his sites!

To Really Be Successful At Supplier Risk Management, ADMIRE!

Not only is supplier risk at the forefront of thought these days, but articles on it are at the forefront of online publications as well, including this recent article in Supply Chain Digest on the key drivers of successful supplier risk management. However, most of the articles miss the point.

For example, according to this article, the trick to successful supplier risk management is to:

  1. engage top-level management,
  2. segment suppliers based on relative risk,
  3. rigorously measure and manage risk,
  4. give category managers tools and training, and
  5. collaborate with key suppliers.

Which is all good advice that is fine and dandy, but it misses the point. Risk management is all about identify risks, identifying mitigations, monitoring risks, and executing mitigations at the appropriate time. Management support is important, but it doesn’t have anything to do with risk identification or mitigation. Segmentation is a good tactic as more attention needs to be placed on suppliers which represent more significant risks, but again it has nothing to do with risk identification or mitigation. The same goes for giving category managers tools and training. Collaboration is relevant only if the mitigation requires collaboration. In other words, in this list, the only key driver is the “rigorous management and mitigation of risk”.

The reality is that success depends on your ability to ADMIRE the situation. Specifically, the ability to:

  • Ascertain the risks,
  • Define the risks that could cause significant damage,
  • Monitor those risks,
  • Identify appropriate mitigations,
  • React when signs of the risk begin to materialize, and
  • Engage the supplier when collaboration is required to mitigate the risks.

That’s it.

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