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Supply Chain Remains a Risky Business

As an industry, we need to shift our focus from thinking about and talking about supply chain risk and do more about actively managing it.

A recent study from Dr. Kevin McCormack of DRK Research, the author of Supply Risk Management: Minimizing Disruptions in Global Sourcing , found that very few companies are developing an active investment strategy in risk management. In response to one of his survey questions, 95 percent of companies strongly agreed that they should monitor and measure supplier risk indicators to predict events. That same group of companies stated that only 30 percent did this job well. That is a huge gap in thinking one thing but not putting it into practice. This is not an isolated case — Aberdeen and Gartner research studies are leading to the same conclusion. So what is really going on here?

(Source: Practicing Cinema 4D)

(Source: Practicing Cinema 4D)

I was presenting at a logistics conference a few weeks ago on the topic of risk management. There was good advance signup for the sessions, but when it came time to attend the session, only 30 percent attended the 45-minute session. I know that this is anecdotal data, but I didn't find it that surprising. If I am to believe the research results, it leads to a possible conclusion that, although there is a lot of interest in managing supply chain risk, there isn't much action being taken, even via attending a short discussion on the topic. Those who did attend the session also expressed the same notions — lots of talk and little action.

So what is going on here? We all know that our supply chains are growing more complicated, for instance by operating in politically and environmentally hostile places. So why don't we have good investment strategies to mitigate risks, or comprehensive plans on how we respond to something when it does happen? The recent SCM World Chief Supply Chain Officer report found that most companies thought the biggest risks are commodity price volatility, followed by safety and shortages. Natural disasters and political events were last on the list. The three most used mitigation strategies are dual sourcing, auditing suppliers, and holding safety stock.

Why does this make me nervous? The three most used mitigation strategies, while being tried and tested, are nothing new to the supply chain. And what makes me even more nervous is that many companies in survey responses state that they don't do a good job at auditing their suppliers.

Take that one step further: Holding safety stock can affect a company's financial performance, and corporate finance teams can, and frequently do, ask that these levels be adjusted in order to meet enterprise objectives. A dual sourcing strategy also can create myriad issues. For instance, how second sourced is a second source? In the tech business, it's all about scale and efficiencies. This tends to lead to geographic manufacturing clusters, large producers of commodity items, and so on. It concentrates risk versus spreading risk. In short, we are using the same decades-old tools, but it's a new playing field and requires new thinking.

So what's to be done? I suggest the first step is to admit that we are in the middle of risky supply chains, and that we should take stock of our company's capability to avoid and mitigate risk. We should then set a clear course on how to avoid risk when possible, how to recover when something does go wrong, and how to price risk into our supply chains in order to make it sustainable when supply issues inevitably do happen.

13 comments on “Supply Chain Remains a Risky Business

  1. owen
    November 18, 2013

    It's just such “Gaps” that led the US Defense Logistics Agency (DLA) to mandate DNA marking on all the microcircuits they purchase, a proactive approach that no doubt will be extended to many other components and many other buyers. While industry talks, it seems they need some arm twisting for them to take it seriously. The “authorized distributor” argument alone isn't enough.

  2. _hm
    November 18, 2013

    Is main reason that it is very low in priority due to cost involved?

     

  3. jesse_securecomponents
    November 18, 2013

    Owen, it's great to see you mention the DLA's DNA-marking program as one proactive approach to supply chain risk. Secure Components is one of a handful of distributors who is approved to do DNA marking. Having gone through the two-day audit conducted by DLA, I can attest first-hand that the issue the author addresses – companies responding the survey that they do not do a good enough job auditing their suppliers – is not an issue for the DLA with respect to their DNA-marking program.

    The DLA has invested heavily in the auditing process and the marking technology. They have responded to the realities and risks of the marketplace, devised a plan and implemented that plan. All credit to them for taking the steps to mitigate risk.

  4. Lavender
    November 18, 2013

    Personally, I think the complexity of supply chain and unpredictable risk weigh more. 

    A successful and worked supply chain management should involves a series of aspects, including procurement, quality control, suppliers selection, delivery… For small companies, the practice is a large burden of cost. 

  5. owen
    November 19, 2013

    _hm, While the cost of implimentation, especially for smaller suppliers, is always of concern and often a barrier, the DLA has provided for reimbursement of compliance costs…

    “DLA recognizes that implementing DNA marking will likely increase costs, and that the costs will be passed on to DLA during the procurement of the parts.”

    A full explaination of their cost reimbursement program is available in their FAQs available here:

    http://www.dla.mil/InformationOperations/sirc/Lists/News%20Feed/CustomDispForm.aspx?ID=61

     

  6. Taimoor Zubar
    November 19, 2013

    “The DLA has invested heavily in the auditing process and the marking technology. They have responded to the realities and risks of the marketplace, devised a plan and implemented that plan. All credit to them for taking the steps to mitigate risk.”

    @Jesse: What kind of an auditing process has DLA invested in? Is it mostly internal or external? Or is it a combination of the two?

  7. Taimoor Zubar
    November 19, 2013

    “A successful and worked supply chain management should involves a series of aspects, including procurement, quality control, suppliers selection, delivery… For small companies, the practice is a large burden of cost. “

    @Lily: I think what makes a strong supply chain is not the individual components but how they are integrated together and work in harmony. Any company can afford to have these individual aspects but what matters here is how well they perform together to add more value to the company. This is where supply chain becomes a key asset for companies.

  8. jesse_securecomponents
    November 19, 2013

    @TaimoorZ Representatives from the DLA in Columbus, OH travelede to our facility and spent two days here auditing us. It was quite a thorough process, which makes sense considering that as Owen mentions they are helping to subsidize the cost of the botanical DNA.

  9. Hailey Lynne McKeefry
    November 19, 2013

    @Owen you make a good point. I'm at a Counterfeit Components Symposium today and one of the suprising things i learned is how bad chips are introduced into the supply chain. For example, as returned product. Trust but verify is the battle cry–the problem is prevailent and the criminals are getting more sophisticated.

  10. Hailey Lynne McKeefry
    November 19, 2013

    @Jesse, thanks for weighing in. What was involved in getting aproval to do DNA marking? HOw many organizations are on that list, do you know?

  11. Hailey Lynne McKeefry
    November 19, 2013

    @Owen, thanks for teh link. Very helpful.

  12. jesse_securecomponents
    November 19, 2013

    @Hailey – As mentioned below, DLA spent two days at our facility conducting a very thorough audit. Prior to their visit there was an application process.

     

    Currently, there are 13 distributors who have been QTSL approved by the DLA. You can find the list here:

    http://www.landandmaritime.dla.mil/offices/sourcing_and_qualification/QTSL.aspx

     

     

  13. Hailey Lynne McKeefry
    November 19, 2013

    Congrats on being part of a very select group. And thanks for the link.

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