A word you often hear following the term “risk” is “reward”. You know – when you compare the expected gain from an investment to the amount of risk undertake to capture that gain. So what’s the reward to having a risk management strategy? Early during my read of the “Essential Characteristics of Supply Chain Risk Management Strategy” whitepaper, I found myself remembering some of the more famous catastrophes in recent history. The Kobe, Japan, 1995 earthquake was devastating to those people in its path, killing more than 6,000. From a business perspective, it destroyed over 100,000 buildings, crippled Japan’s largest port for months, and sent many large corporations scrambling to respond and recover from what had happened. Toyota found themselves with over 20,000 automobiles unable to ship due to the damage. Hurricane Katrina compromised 5 major ports in the Mississippi River basin – effectively halting operations responsible for 450 million tons of annual cargo. Such epic events can destroy companies in a single instant!
I guess “to survive” is the reward.
This paper does a great job of describing where risk is introduced into the supply chain, and why it has become more topical in executive boardrooms of the manufacturing enterprise. Each contributing element, such as global outsourcing, pandemic, volatility and variability of demand, terrorism, tighter logistics capacity, etc, when combined with one another form a substantial risk profile. Come to think of it, I see two distinctly different categories of supply chain risk here – the deep cut that results in instant and massive impact to the business, such as a hurricane, or pandemic, or destruction of a sole source supplier of materials; and then there are the hundreds/thousands of seemingly minor unexpected events that occur each day that, by themselves, do little damage to a company, but when left untreated for weeks/months on end, can result in an equally massive impact. Both categories of supply chain risk require different mitigation approaches. In the latter case, having a formal detection system capable of alerting appropriate stakeholders in well-enough time to recover would limit the risk exposure, and such technologies are readily available for any sized company. Risks from epic catastrophes, however, also require significant thought to supply chain design, supplier selection, and, what is often overlooked, proper insurance policies guaranteeing companies will have the necessary working capital to recover.
As this paper suggests, companies are operating under significant and increasing risk profiles. Those enterprises that choose to operate without a safety harness may find themselves out-valued by those companies that adopt a thorough supply chain risk management strategy.