The average disruption in company supply chains can erase around 30% of shareholder value. However, by learning how to manage a company’s various supply chains according to the business objectives they aim to achieve, this risk can be managed very effectively.
“Supply chain risk is a growing concern at an executive level,” says supply chain thought leader Douglas Kent, former vice president of Avnet Velocity and speaker at the recent SAPICS regional conference. “The more global and integrated we’re becoming, with increasing dependence on suppliers and other factors we can’t control, we’re becoming more vulnerable to risk.”
Identify - many companies risk serious disruption, reputational damage or financial ruin because they have so little visibility over their extended supply chains.
Identifying risk through increased supply chain visibility is therefore critical in managing risk. “Risks need to be identified in terms of suppliers, customers and internal risks; and then assessed and quantified in order best to determine how to manage them.”
When it comes to identifying risk, the first question that needs to be asked is how many supply chains a company has. Different supply chains operate according to different business objectives. Therefore, they need to be handled differently.
Using IT to track indicators, such as suppliers’ lead times, enables one to run analytics that will help one understand what is happening in a supply chain over time – and therefore identify potential risks. To this end, the world’s largest companies run expensive cloud-based ‘control towers’ that enable them to gather and analyse enormous amounts of data. But, even smaller companies should be gathering and analysing data to the best of their ability.
Quantify - In order to decide which risks one can afford to mitigate, it is necessary to calculate VAR, which is the sum of the probability of risk events, multiplied by the monetary impact of the events for all supply chain functions.
By expressing the likelihood of each risk taking place in an annual percentage – the chance the event will occur in a given year - and considering the financial impact, VAR helps answer questions like whether the risk of outsourcing supply to a foreign country is worth the saving.
Mitigate - With the risks quantified, it’s time to determine whether each supply chain needs to perform at a superior level, with an advantage to competitors, or on a similar par to them.
Next, you need to decide what the competitive requirements for each supply chain will be and to what degree you’re going to pursue performance attributes: reliability, responsiveness, agility, cost, assets. For example, if you’re pursuing 98% order fulfilment (reliability), then you’ll have much inventory. But if you’re competing on cost, you can’t do that.
It’s up to the executive team to determine what the competitive requirements are. Once you have this direction, you can work towards it. Then you can figure out your game plan.
Armed with this understanding, one can then determine your risk tolerance within a supply chain. For example, if you’re focused on reliability, then the supply chain has a low tolerance for risk that affects reliability. Therefore, risk mitigation in this case might mean obtaining more inventory. One’s approach all hinges on the business objective.
It’s important to note that increasing cost, for example in the case of enlarging inventory, is regarded as acceptable expenditure since it enables risk management. Extra inventory that mitigates risk is a purposeful investment - not waste.
Finally, when it comes to risk mitigation tactics, the following may apply: collaboration, postponement, modularity, redundancy, performance-based contracts and IT investment.
The best option is collaboration - working more closely with customers, suppliers and internally; however, most companies are more likely to employ redundancy tactics such as increasing inventory, buffer capacity, multi-sourcing and production flexibility.
Collaboration costs less than redundancy but it requires way more dedication to relationships and hard work, bearing in mind that the number one barrier to collaboration is trust.
However, it’s worth it in the end. Making risk management a core competency is what makes the difference between a good company and a great one.
Douglas Kent, Top Supply Chain 'Pro-to-Know' - Supply Chain Thought Leader, Advisor, Academic and Practitioner
