Peas and carrots, strawberries and cream, risk management and supply chain management. OK, that last pair doesn't have the same ring to it, but I'm sure supply chain professionals are more than aware of the intrinsic relationship between the two.
The buzz around supply chain risk management recently is that there is “lots of talk and little action. I tend to disagree. I believe supply chain managers are constantly challenged to perform along the razor's edge. Excess inventory means a risk of obsolescence, and lean inventory introduces the risk of stockouts. Both can put a brand's reputation at risk and impact your bottom line. Almost every tactical tradeoff made on a daily basis, whether related to inventory, transportation, production, or planning, is based on constraint-based management, with a constant balancing of our appetite for risk and our tolerance to it, and with the target of optimization.
With respect to supply chain risk, the difficulty is that we seems to be trying to work while wearing a blindfold. According to recent SCM World research, the high-tech sector (along with fabric and apparel) has the best visibility into its supply chains but still needs improvement — 27% of high-tech companies have visibility only for their Tier 1 suppliers, and only 21% have visibility beyond Tier 2.
In a survey by PwC and the MIT Forum for Supply Chain Innovation, 82% of participants said they had continuity plans in place to mitigate disruptions, and 79% had implemented a dual-source strategy. Does this indicate that we are reactive as a discipline? Are we dealing with issues as they arise but potentially missing the weak points that could have the biggest impact on our supply chains — the unknown?
The areas where tactical effort should be devoted can be prioritized and better focused using business impact analysis approaches such as Dr. David Simchi-Levi's Risk Exposure Index. This promotes the idea that we shouldn't necessarily focus on where we have our biggest procurement spending or where we assume our supply chain faces the biggest risk. Rather, we should focus on suppliers that would have the biggest impact on our supply chain in terms of recovery time and our bottom line.
The Supply Chain Council's Value at Risk method can provide a similar focus, where the total value at risk as a result of a disruption can be calculated, and risks can be prioritized. To provide visibility and understand risk at the start of a supply chain, the Sustainability Consortium's Commodity Mapping tool can map “the environmental and social risks a company faces in buying commodities around the world.”
What happens when our attempts for optimization exceed our risk tolerance, and we inevitably fall off the razor's edge? Or what happens when a natural disaster takes part of our supply chain out of action? This is where a vital part of risk management comes in — continuity management. We can be very good at optimizing at the tactical supply chain level based on our appetite for risk, but if we don't recognize the importance of implementing and practicing strategically focused supply chain resilience and recovery processes, we are missing a big part of the opportunity.
As mentioned in the Business Continuity Institute's Supply Chain Resilience 2013 survey, “proactive leadership, rather than crisis management, is required.” For example, you probably know who to call if your computer doesn't load in the morning or if a piece of manufacturing equipment fails, but would you have a proven process set up for managing a supply chain disruption such as a contract manufacturer or Tier 2 supplier being taken out of action?
The cost of not having such recovery processes set up can put your organization out of business, and the opportunity for the supply chain that recovers the quickest can make your supply chain the market leader.