Global logistics: Reassessing risk
The global economic downturn has changed the nature of supply chain risk. How ready are companies to face and respond to this new challenge?
By Jade Rodysill, Craig Faris, and Bill Spinard, Accenture -- Logistics Management, 6/1/2009
The global economic downturn has changed the nature, magnitude, and complexity of supply chain risk. The most compelling implication may be the need for supply chain leaders to rethink their companies' most serious risks and potentially rebalance the trade-offs between cost optimization and effective risk management.
In Accenture's view, three areas of significant supply chain risk have emerged as top management concerns:
1. Vendor and supplier stability. Despite the best efforts of many companies, the negative effects of the downturn on vendor and supplier stability are poised to wreak havoc on many supply chains. Upstream supply chain partners may have devolved from stable to shaky—victims of liquidity and cash flow problems.
From a buyer's perspective, the most serious result is production gaps and delays caused by supplier misfortunes. Sourcing strategies and production plans could be subject to failures due to a rapid decline in a supplier's financial viability—perhaps the inability to access sufficient working capital or a newfound unwillingness to ship unsecured raw materials.
2. Product quality and safety. At many organizations, efforts to squeeze every last molecule of cost out of manufacturing and distribution processes have (however unintentionally) reduced quality controls and oversight—even as more counterfeit and contaminated products find their way into the supply chain.
It is a problem that cuts across industries and companies. For example, the acting administrator of NASA recently testified before a Congressional subcommittee that some of the agency's cost overruns are due to counterfeit parts. On the same line of thinking, some forward-looking retailers have introduced a more rigorous and transparent quality control program for their suppliers. Yet another example is the revision that was precipitated by safety concerns over pet food, drugs, children's toys, and baby cribs.
Contaminates in the food chain have commanded the most media attention. The salmonella outbreak at Peanut Corporation of America (PCA) is only the latest in a long chain of problems. The New York Times recently reported that the contaminated PCA facilities had received a "superior" rating for food safety not long before the outbreak. This is particularly disheartening because it reminds us that food quality issues are potentially systemic: We cannot blame all our problems on quality standards in other countries, and companies cannot depend solely on the U.S. government's food inspection process.
3. Demand forecasting. The ability to accurately forecast sales lies at the heart of a well-oiled supply chain. Forecasting is the most critical contributor to production and delivery scheduling, and to decisions regarding channel selection and pricing strategies. Unfortunately, the recession has made accurate sales forecasts far more difficult to achieve.
A distinguishing feature of this recession (and a major reason for the slow recovery) is the widespread degradation of consumer and commercial balance sheets. Steep declines in the value of consumers' primary assets, housing, and retirement funds have wiped out hundreds of billions of dollars in wealth. And consumers have responded by spending less and focusing instead on paying down debt. This new era of low spending and unpredictable consumer behavior will render many demand-forecasting models inaccurate or even obsolete.
The Big Picture
How ready companies are to face and respond to the above challenges is not clear. What is clear, however, is that a new world economic order has taken hold and that many of a company's most fundamental assumptions about risk must be revisited as a result. One such assumption may be the sanctity of short-term cost savings and returns—not always the best idea if longer-term stability and improved positioning in a much tougher business environment are compromised.
Broadly speaking, the need is for a thorough and objective evaluation of supply chain risk-management approaches and processes. Key to this prescription is the term "objective." Too many companies overestimate their capabilities, underestimate risk, and oversimplify the solutions. To keep this from happening, a review of risk management approaches would typically include the study of:
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which market assumptions have recently changed;
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new risk influences and implications;
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risk's impact on competitiveness;
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which processes are affected, which are stable, and which may need to change;
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keys and approaches to integrating upstream and downstream process changes;
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and risk-monitoring, measurement, and communication capabilities.
Following the study must come implementation, and this step is neither simple nor geared to quick "how to" recipes than can be packaged in a short article. Still, there are several common activities, including assessment, that will likely be addressed by most companies embarking on such a journey. These activities (summarized in Figure 1) are worth noting because they can help companies understand what to expect during the lifecycle of such a program.
Perhaps most important, however, will be establishing an ever-tighter link between enterprise risk management (ERM) and whatever formal approaches the company has developed for enterprise performance management (EPM). The idea is to interweave risk mitigation with corporate operating models, performance goals, accountability strategies, and decision-making frameworks.
Near-Term Action Plan
Getting a formal risk-abatement plan off the ground may not happen fast. So what might a company's supply chain leaders do in the short term to prepare their companies for the unknown? One practical step would be to look at the problem from three perspectives:
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What is the range of possibilities?
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What are we currently prepared for?
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What do we need to be prepared for?
To answer these questions, a quick scenario-planning exercise can be helpful. First, pick an emerging risk to consider—perhaps one of the three discussed earlier. Then convene a small group of knowledgeable leaders to brainstorm three distinct, but plausible, situations relative to the risk. Take vendor stability: The three scenarios could include one in which 50 percent of your upstream suppliers declare bankruptcy, a second that involves a complete loss of one critical type of supplier, and one scenario consisting of significant supplier loss spread over the next five years.
Then have the group consider:
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How is the company positioned to compete relative to each of the scenarios?
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How would operations and profitability be affected if each scenario were occurred?
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What are the major gaps in the company's current plan, relative to the scenarios?
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How do we close those gaps?
The valuable outcomes of this exercise are potentially twofold. The first is newly focused thinking about what the possibilities are and why they are important. The second is a highlighting of key supply chain vulnerabilities.
They may seem simple, but the reality is that few companies have taken even the most rudimentary step, and even fewer follow through with necessary changes. That distinction is what separates high-performance companies—those that work proactively—from the great majority of lesser-performing and less successful organizations.
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