Supply chain risk strategies every organisation must know
March 2018 | SPECIAL REPORT: MANAGING RISK
Financier Worldwide Magazine
March 2018 Issue
Risk management traditionally resides within the finance function of an organisation due to its impact on the bottom line. However, many companies fail to separately assess supply chain risk, even though it is becoming a growing concern for those tasked with managing it. A recent study we carried out jointly with Michigan State University found that supply chain risk is one of the top concerns keeping today’s supply chain executives awake at night.
Besides a lack of sleep, supply chain disruption can result in several other consequences, including a loss of productivity, an increased cost of working and more complaints from customers. And the risk is prevalent: nearly two out of three businesses experienced at least one disruption last year, according to the latest report from the Business Continuity Institute (BCI).
Supply chain risk extends from the supplier’s supplier to the customer’s customer and includes the global environment in which they operate, so an end-to-end supply chain encounters numerous potential challenges. When making critical decisions, supply chain managers must be adequately equipped to measure the likelihood and impact of risks and should employ a disciplined risk management process. There are four primary supply chain risk management strategies to consider: avoidance, transfer, mitigation and acceptance.
If you can control the sources of supply chain complexity, you can decrease the likelihood of risk. Wise executives will look for specific areas or processes in which they can reduce or eliminate risk, leading to a stronger organisation overall. For example, technology can play a significant role in risk avoidance. According to Deloitte, 35 percent of businesses are currently using automated techniques. That number is expected to more than double – to 74 percent – within the next decade. And as new technologies continue to develop and grow, they will prove to be even more critical to business operations.
Yet, we also know that increased technology usage has created opportunities for hackers and other cyber criminals. Therefore, cyber security is an essential risk-avoidance strategy. Protecting your data, and the data of all your value chain partners, can be just as important as protecting your goods and your facilities. Across an organisation, professionals must consider the implications of a data breach and plan accordingly. Know the damage that can be done digitally and consider it a fundamental aspect of any risk-planning exercise.
When risk cannot be avoided, looking for ways to transfer that risk is the next-best strategy. For example, you may buy fire insurance for your distribution centre. While the insurance premiums can be expensive, a fire could destroy inventory that took years to build and would be prohibitively expensive to replace. With the risk transferred to the insurer, an organisation can receive partial or full repayment. Another way companies can transfer risk is by including language in contracts that shifts responsibility to the supplier or carrier. If any losses are incurred along the way, the supplier or carrier is responsible. While transferring risk will not eliminate the risk entirely, it ensures that the company can recover and resume its operations quickly.
Instead of transferring risk to other supply chain partners, companies might be better served if they emphasise greater data transparency, a critical element of risk management strategy. Supply chain partners, like insurers, benefit from shared data that is analysed and acted upon. For example, reliable data can provide suppliers with a foundation for a business continuity plan in the event of a facility shut down. For insurance companies, it gives a clearer picture of their supply chain exposure, enabling them to provide higher coverage limits and offer the proper risk premiums.
At present, organisations and insurers are not sharing this data consistently. The BCI report states that 69 percent of executives do not have full visibility into their supply chains. What is more, nearly a quarter do not analyse the source of the disruption. As risk management becomes more important across business functions, sharing and analysing data must also become a priority.
The third strategy for tackling supply chain risk is mitigation or enacting preventive measures to reduce the probability or severity of a threat. Take, for example, distribution – one of the primary concerns among supply chain professionals. A breakdown in delivery will lead to lost sales, decreased revenue, margin erosion and profit loss. These are problems that plague an entire organisation, not only the supply chain function. More importantly, a delivery breakdown damages the reputation of the business. To effectively mitigate distribution disruption, supply chain professionals perform thorough risk analysis at each origin, intermediary point and transportation link. This enables them to see all areas of potential harm and determine how best to allocate resources to protect against vulnerabilities. For example, for a transportation failure, companies might employ redundant vehicles, modes and operators. Supplier failures are mitigated through the use of multiple suppliers.
If you have exhausted the three strategies previously outlined, there is a fourth option: acceptance. The cost of avoidance, transfer or mitigation may simply outweigh any potential benefits. In those instances, business leaders might decide their best course of action is to accept the risk and its consequences as a cost of doing business.
Whichever strategy an organisation chooses, it should come as a result of thorough research, planning and analysis. Businesses would also benefit from collaboration across functions. While an individual department – such as supply chain and procurement or risk management – can manage risk to a certain extent, operating within silos limits the effectiveness of an organisation overall.
As much as we appreciate organisations that run smoothly, supply chain risk is constant. The companies that tackle it head-on and develop clear risk management plans will come out on top.
Abe Eshkenazi is the chief executive of APICS. He can be contacted on +1 (773) 867 1778 or by email: firstname.lastname@example.org.
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