Supply chain risks rising, companies not taking action, says Marsh report

Sean A. Murphy, Supply Chain Management Review -- Logistics Management, 4/21/2008

NEW YORK—An increasingly global corporate community is making for a higher degree of supply chain risk, but companies in North America have a shocking lack of preparation for disaster, according to a new report released last week by a prominent corporate insurance company.

The problem: Corporations have traditionally allowed risk management to take a backseat to cost, service, and other company priorities, according to Beth Enslow, senior vice president of supply chain risk management practice for insurance broker and risk advisor Marsh Inc.

According to Enslow, the problem speaks to a lack of a holistic approach to supply chain risk management on the corporate level.

“That’s where there’s been a huge black hole,” she said.

Enslow is author of Stemming the Rising Tide of Supply Chain Risks: How Risk Managers’ Roles and Responsibilities Are Changing, a report summarizing a study of 110 North American corporate risk managers conducted by Marsh and Risk & Insurance magazine.

The study asked risk managers to discuss how prepared they are for a storm, tainted product, labor shortage or other event that could disrupt their supply chains.

The results showed an awareness of danger and risk, but very little is being done about it. According to the report, 73 percent of the respondents said supply chain risk has gone up since 2005, and 71 percent of the study’s respondents said the potential financial impact of supply chain disruption has also grown.

Enslow said the increased emphasis on lean and the growing corporate globalization are contributing to the higher risk, along with high-profile media accounts of problems with products from China, such as the lead paint toy scandal or tainted imported drugs killing patients in the U.S.

Despite the increased awareness, when asked to describe how effective their companies were at supply chain risk management, none of the risk managers surveyed indicated “highly effective,” and only 35 percent called their efforts “moderately effective.”

The report also indicated 65 percent of respondents characterized their risk management practices as having a “low” or “unknown” effectiveness, or had no risk management program at all.

Right now, Enslow said, the study indicates corporate leaders prefer a reactionary approach to risk management, rather than a comprehensive plan to prepare for the worst.

“Risk is still kind of a gut feel,” Enslow said, “as opposed to something that is vigorously assessed.”

Enslow said the traditional practice of “siloing” puts up walls that prevent a company from working as a single unit in a time of crisis. When working on a risk management plan Enslow said management needs to take a holistic approach, using a cross-functional team to make sure everyone in the company remains in the loop.

“It’s almost impossible to assess your supply chain risks if you don’t have that cross-functional view,” she said.

The study shows companies aren’t doing that yet, with only 31 percent of respondents indicating they have cross-functional teams to manage supply chain risks, and 19 percent of respondents—fewer than one in five—from companies with more than $1 billion annual revenue indicated they used cross-functional teams.