Gone are the days when we could merely apply simple creditworthiness checks for individual suppliers. Where companies historically produced a significant part of their products themselves, they are today focusing their efforts on their core capabilities and moving more and more of the manufacturing of their products to external supply networks that operate on a global basis. The reasons for this are shorter production cycles, just-in-time strategies, and maximization of shareholder value, to name a few.
The resultant new supply chain, with increased global dependencies, leads to a complex risk structure that requires on-going monitoring of different risks. Risks faced by companies these days are manifold and ever present: shortage of raw materials, production plant failures due to natural disasters, strikes at logistics hubs right up to political unrest and non-compliance with social and environmental standards along the supply chains.
That is why supply chain risk management (SCRM) today involves taking a comprehensive approach to risk through-out global supply chains: identification, analysis and managing of risks in a continuous process.
Developing a comprehensive risk strategy that includes both preventive and reactive plans is consequently more important than ever. And market leaders are now embracing the opportunity offered by a strong SCRM program to act rapidly and effectively in a crisis situation thereby turning risk into a competitive advantage.
Read also our Spend Matters Whitepaper to learn about how companies can accomplish the goal to introduce a comprehensive Supply Chain Risk strategy.
Supply chain risks can threaten the very existence of a company, as witnessed in examples over the past couple of years. It is therefore not surprising that executive boards and business managers expect enhanced risk management programs from their procurement, supply chain and logistics departments.
In view of the various types of risks, all concerned departments should be included in the development of a risk strategy, which includes both preventive measures and reactive plans for all eventualities. Besides procurement, logistics and supply chain, other stakeholders include research & development, production, quality, accounting and insurance.
To ensure that this cross-functional integration works on a sustainable basis, supply chain risk management requires top-level management awareness, clear responsibilities and defined roles. SCRM programs are now an integral part of the broader enterprise risk management program and assignment of an individual responsible for driving supply chain risk in an organization is now commonplace.
51% of supply disruptions originate below tier-1.
Where suppliers are distributed all over the world, it is consequently extremely important to ensure not only transparency with regard to all direct suppliers (tier 1) but also to their supply chains. Most companies limit their risk analysis and mitigation activities to their tier-1 suppliers despite the fact that a disruption below the first tier has the same impact.
(Source: Business Continuity Institute, SUPPLY CHAIN RESILIENCE REPORT, 2014)
Figure: Components and material flow in an end-to-end supply chain. In addition to suppliers (1-n tier) this includes locations, transport routes, countries, own sites and customer sites.
Even smaller suppliers matter. A study by the Massachusetts Institute of Technology in collaboration with Ford determined that 2 % of supplier sites comprising a relatively small amount of spend would have an ordinate amount of damage and impact the entire sales of the company in the event of a supply chain disruption. Making the case that all suppliers, locations, hubs, warehouses should be included in risk monitoring.
(Source: „From Superstorms to Factory Fires: Managing Unpredictable Supply-Chain Disruptions“, D. Simchi-Levi, W. Schmidt, Y. Wie; https://hbr.org/2014/01/from-superstorms-to-factory-fires-managing-unpredictable-supply-chain-disruptions)
74 % of companies experience at least one supply disruption every year. Despite this high percentage, it is remarkable that 72 % of companies do not have complete transparency concerning their supply chain or a SCRM program that includes all tiers of their supply chain. Based upon these facts, a supply disruption and, in turn, production downtime and loss of sales are virtually assured.
(Source: Business Continuity Institute, SUPPLY CHAIN RESILIENCE REPORT, 2015)
Regardless of Loss of Productivity, increased cost of working or Loss of Revenue - every single occurance of a supply chain disruption itself is dramatic enough. In most cases supply chain disruptions lead to several consequences at once, which result in a horror scenario for every organization.