Your supply chain is costing you money – Reason #5 Not having a supply chain risk management process
Over the years, working for and with numerous manufacturing companies, I’ve seen many supply chain practices that cost companies money. Over the next several weeks, I’ll outline these issues and discuss some ideas around how to avoid these practices. You can find the previous posts here:
- Reason #1: Offshoring without getting the full picture
- Reason #2 Poorly executed or non-existent sales and operations planning
- Reason #3 Not having end-to-end supply chain visibility
- Reason #4 Making key decisions by modelling the supply chain in Excel
Reason #5: Not having a supply chain risk management process
In today’s society, unless you are rich enough that you can afford to replace your possessions, pay for your health care, and cover your liabilities, you have insurance (unless you are poor enough that you can’t afford the premiums). Insurance is a form of risk mitigation. Insurance protects us against theft, fire, accidents, and health emergencies and if this were to happen, it can provide for our family when we pass. Yet, a surprising number of companies (while they have traditional insurance) do not have a supply chain risk management “insurance” aka a supply chain risk management process. To put it another way, they have insurance to protect them if someone trips on their property and sues, but don’t have a risk management process to mitigate against their top supplier going out of business. The insurance covers what could be a million dollar risk, supply chain risk management protects against what could be a MULTI-BILLION dollar risk.
Supply chain risk can be broken out into multiple different types;
- Geographic: This includes natural disasters and political unrest. These are the types of issues that impact supply for an entire region. We saw this type of issue over the past several years with the Japan earthquake / Tsunami in and with the Thailand floods. Political issues can also have a significant impact on supply. Conflicts, government policy changes, regulatory changes and coups can mean that supply is suddenly turned off or that a market is no longer available.
- Supplier issues: This includes quality issues, delivery reliability, financial stability, reputation, strikes, and pricing changes. We talked about many of these issues in the first post of this series – “Offshoring without getting the full picture”. The key point here is that in today’s connected supply chain, your suppliers are an extension of your own business. If your supplier fails financially, it will impact your business. If your supplier goes on strike or can’t deliver for some other reason, it will impact your business. If your supplier has had a shaky human rights record, your business’s reputation can get tarnished. If your supplier decides that you need to pay more or global currency exchange rates drive up the cost of a component (and you have no alternatives ready to go) your margins can be significantly impacted.
- Customer Demand: Interestingly, this is often ignored when people think about supply chain risk however, it can be one of the biggest factors. If your demand decreases, you have excess inventory or idle capacity. If your demand disappears completely you are out of business. If your demand increases significantly, your supply chain can be overwhelmed and delivery becomes an issue.
IT security: This is also often ignored when thinking about Supply Chain risk. If you’ve been watching the news lately, you know that hackers seemingly are able to access corporate records at will. Imagine now, if hackers accessed your design systems…. Your customer records, your accounts payables / accounts receivables. Imagine if your proprietary designs and customer records were sold to your competitors. Not a pleasant idea to think about but something that is happening every day despite the billions of dollars spent on IT security.
In the post “Innovate approaches to Supply Chain Risk” I describe 4 key action areas that companies developing a more systematic, focused and proactive supply chain risk management approach need to address as outlined in a report by SCM World;
- Identifying and assessing risk – This includes visibility across the supply chain including a good understanding of the companies involved. Leaders like Cisco and IBM utilize dialog with suppliers and customers as well as visual risk mapping and scenario planning techniques
- Quantifying and prioritizing risk – Given that all companies operate on limited resources, focus on those areas that will deliver the biggest benefits. One way is to plot likelihood of occurrence against business impact. While this approach can work well for recurring operational risks like supplier performance, it doesn’t work as well for hard to predict incidents like natural disasters. One approach suggested in the article is that supply chain managers assign financial impact and time to recover factors at a site and component level. This tends to identify critical but low-spend suppliers that may otherwise be overlooked.
- Mitigating Risk – inventory tracking and dual sourcing are considered to be the most effective risk mitigation strategies. Also increasing use of standard components, segmented and regionalized supply chain strategies and business continuity plans
- Speeding Recovery – Business continuity plans that have been developed and tested with suppliers are key to rapid recovery
Supply chain risk management is like insurance. You hope you never need it, but if you do, you will consider it the best investment you ever made.
Do you have a supply chain risk management process in place? What risks worry you and how do you mitigate against them? Comment back and let us know!