SUPPLY CHAIN RISK MANAGEMENT

Supply chain risk management – more important than ever

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.

Safeguarding sales and reputation with supply chain risk management

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.

The objectives of supply chain risk management and the benefits of a secure supply chain include:

  • Ensuring production and delivery capabilities
  • Avoidance of sales losses
  • Safeguarding the corporate image and customer satisfaction
  • Simplification of certifications
  • Fulfillment of regulatory requirements and compliance

 

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.

Rooting SCRM firmly in your company

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.

Why you should act now!

The entire end-to-end supply chain is cause for concern.

 

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.

­ Small parts, big impact

 

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)

Frequency of supplier 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)

 

 

­ Top 5 consequences of supplier disruptions