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Supply Chain & Risk Management Go Together Like Peas & Carrots

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.

16 comments on “Supply Chain & Risk Management Go Together Like Peas & Carrots

  1. CPeterson
    January 27, 2014

    Great article Mr. Cowan. I agree with your points about managers operating on the razor's edge and striving for optimization; it is great that you referenced the methods in use to sort out where to start. SC managers can use Simchi-Levi's Risk Exposure Index and the Time To Recovery to evaluate their supply chain and decide where to spend their efforts to minimize risk and reduce their exposure. Well done!

  2. Eldredge
    January 27, 2014

    Peas and carrots, strawberries and cream, risk management and supply chain management.

     


    “Love and marriage” would have worked well here too!

  3. Eldredge
    January 27, 2014

    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.

      
    So true – and the outcome is the final arbiter. It's a harsh game if youa re on the losing end.

  4. ahdand
    January 28, 2014

    @Eldredge: I think Risk Management is integrated with any system since there is a risk involved in any system or process. So its always a must to have a Risk Management implemented even at least in a smaller scale.  

  5. Houngbo_Hospice
    January 28, 2014

    @nimantha.d: The goal of the article is to raise awareness on the importance of risk management in the supply chain. failure to not giving much thought to risk management, can result in significant costs to resolve supply-related issues, and financial difficulty in the future.

  6. Eldredge
    January 28, 2014

    @nimantha – I agree. And there are a lot of risk management tools available, includung failure modes & effects analysis (FMEA), risk radar,  design FMEA, cause analysis (after the fact), and many other risk assessment and management techniques.

  7. Taimoor Zubar
    January 29, 2014

    @Eldredge: Do you think these risk management applications differ from industry to industry where one application might be more suitable for a particular industry compared to others? Or are these tools equally useful across the board?

  8. Taimoor Zubar
    January 29, 2014

    “Love and marriage” would have worked well here too!”

    @Eldredge: Good one! Like they say, every reward has an associated risk with it. Higher the risk, greater the reward. I'd say all good things in life come with an attached risk element.

  9. Taimoor Zubar
    January 29, 2014

     

    “As mentioned in the Business Continuity Institute's Supply Chain Resilience 2013 survey, “proactive leadership, rather than crisis management, is required.””

    @Robert: I've always considered the process to be more important than the people because people can come and go but the process can remain stagnant. Crisis Management is all about having a process in place to handle a crisis when it strikes. A focus on leadership would mean that you consider people more important. I find that a bit hard to digest.

     

  10. Eldredge
    January 29, 2014

    @TaimoorZ – Each risk management tool definitely has it's focus area, be it strategic risk evaluation, safety and environmental protection, disater preparedness, elimination of design faults and liability, root cause anaysis, or many other applications. Some techniques (probably most) have some usefulness across many of these.

  11. Eldredge
    January 29, 2014

    @TaimorZ – Indeed! In some situations, more than one party has to evluate the risk/reward quotientbefore deciding the right couorse of action.

  12. CourtneyMorgan
    January 29, 2014

    Great article!!!An efffective supply chain process must go hand in hand with an equally effective risk management strategy.

    http://www.cpsmtraining.com

  13. Williamson
    January 29, 2014

    Rightly said, risk management and supply chain certainly help each other improve efficiency and production management. Retailers can ensure they stay competitive by improving their shipping and delivery systems to meet the changing and ever growing consumer demand. I work for McGladrey and there's a very informative whitepaper on our website that readers of this article will be interested in. @ “Count, manage and move: Warehouse inventory control strategies” http://bit.ly/1kgYXWo 

  14. Robert_Cowan
    January 30, 2014

    @TaimoorZ – Thank you for your feedback.  Let me clarify: 'Proactive leadership' in this case is from the point of view that without leaders acting proactively to identify risks, establish mitigation strategies and risk management processes before disaster strikes, resilience would not be achievable.

    I take 'Crisis Management' to mean that something happens with an element of surprise, an unpredicted event that puts your supply chain out of action.  I see crisis management as dealing with each crisis as it happens, rather than planning for its eventuality.  I would therefore argue that crisis management is the last resort.

  15. Taimoor Zubar
    January 30, 2014

    @Robert: I agree on the fact that good leaders are the ones who plan in advance to identify potential risks and mitigate them. However, even they have to rely on the creation of processes to manage risks rather than focus their energies on adhoc efforts.

  16. ahdand
    January 31, 2014

    @Taimoor: Yes good leaders do have a plan for the future. If not they cannot be good leaders. You do need to have an idea of what will happen in the future and should have a plan for it so its a matter of executing it at the right moment.  

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