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With supply chains expanding in size and complexity, enlightened professionals and companies are focusing more energy on managing supply chain risk. While the topic is gaining prominence in boardrooms, many companies do not yet have a sufficient grip on the risks they face. Globe-spanning extended supply chains are susceptible to myriad disruptions. These range from the fairly typical and mild fluctuations of the “normal” course of business to major disruptions, such as lost production capability caused by a fire at a crucial fabrication plant, or the closing of ports or transportation corridors due to a natural disaster. Many organizations do not commit the time and resources necessary to understand global sourcing and the ramifications, costs, and benefits of redesigning supply chains to better manage risk. To address this, companies can implement programs to identify and profile risk variables, quantify risk for business decision making, and implement IT solutions – leading to greater resilience and efficiency and improving the bottom line.
A WORLD OF RISK
Supply chains today are growing continuously more complex, interconnected, and global – for example, entering low-cost countries in search of good production and labor conditions or a favorable economic climate. Operations become increasingly dispersed as distances expand between links in the chain – or perhaps more accurately, between nodes in the Web. Along with the greater distances and longer lead times that result, complexity increases, while more regulatory and compliance issues pose greater operational challenges. And these are merely the broad strokes of the complicated picture of today’s supply chain management issues.
There is some irony in that the very efficiency of modern supply chains can contribute to increased vulnerability. The tenets of lean production methods and just-in-time manufacturing and delivery have led to the paring and honing of supply chains into finely tuned models of efficiency. But this approach calls to attention an inverse relationship between efficiency and risk. For example, single-source supplier strategies can result in favorable volume rates and excellent service. But if that supplier has a major disruption in its supply chain, its customers are left completely vulnerable. The answer is not to disregard the efficiencies of such practices, of course, but companies must be able to understand, profile, and manage the attendant risks – for example, weighing the expense of duplicate machinery against the possibility of lost production.
Events anywhere in an organization’s extended supply chain can cause disruptions and process execution failures with deep financial ramifications. Complexities arising from the number of participants in the supply chain can make it hard to identify weak spots. Companies will typically document and account for events after the fact – after the damage is done – but many do not sufficiently address these issues in the supply chain network design phase. Often, too, companies recognize immediate effects with sufficient clarity, but fail to see other more subtle, long-term – and expensive – consequences. Understanding the implications of supply chain redesign and global sourcing in this light is essential to a company’s long-term viability and economic success. Companies can take the following key steps to better address risks in their supply chains, as follows:
Identify and profile risk variables
Assign appropriate factors to risk for quantitative inclusion in business decision-making processes Understand how technology tools can enable the organization to better manage risk in the context of overall goals.
The topic of risk in business is of course not a new one. Risk is the bread and butter of the insurance industry, and is defined in the abstract as the possibility of loss in the real world. Used as a noun, “risk” can refer to physical property to be protected by an insurance contract, or to an entity to be ensured, either a person or a company.
In the world of finance, the term covers a wide range of categories and nuances, but at the highest level it falls into two main categories – systemic risk and nonsystemic risk. Systemic risks refer to those unique to a particular company, while nonsystemic risks are big-picture, macro factors that affect all businesses, such as global political and financial conditions. These definitions, and the strategies and processes other industries use to understand and manage risk, can also be applied to supply chain management.
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