Pearson on Excellence: Part 1: Insights on supply chain risk

Risk—particularly as it applies to supply chain management—certainly seems to be increasing. Consider the inordinate number of recent political upheavals and their potential to disrupt supply chains; or maybe the effects of the recent year’s economic turmoil, the increase in cyber intrusions and widely fluctuating commodity prices. At Accenture, we refer to this confluence of risk factors as “permanent volatility”—multiple events hitting simultaneously, with increasing frequency, intensity, pace, and duration.

The capstone of this risk-research review is a project Accenture conducted with the World Economic Forum (WEF) to work with supply chain leaders from business, government, and academia to understand the nature and implications of risk in the 21st Century. Initiatives undertaken included surveys and executive interviews across myriad industries and regions. We also cite risk-related investigations performed by other groups.

Observations
Ninety three percent of executives surveyed by the WEF agree that supply chain risk management is a growing priority. Accordingly, most major organizations have put in place some form of enterprise risk management program. In a 2011 survey of almost 400 executives in 10 industries, Accenture found that 80+ percent of respondents have an enterprise risk management program in place or plan to implement one within two years.

Detailed analyses appear to confirm the wisdom of these moves: About one third of WEF interviewees estimated post-disruption losses equal to 5 percent or more of their companies’ annual revenues. A longer-term study tracked the impact of 885 supply chain disruptions suffered by publicly traded companies from 1992 to 1999: Operating income dropped by 107 percent, return on sales fell by 115 percent, and return on assets decreased by 92 percent.

Principal risk categories
WEF researchers identified four primary types of external disruptions.

• Environmental. The survey found that 60 percent of WEF participants cited natural disasters as most likely to cause widespread supply chain disruptions. According to a Swiss Reinsurance Company study, worldwide economic losses from natural disasters in 2010 totaled $194 billion. A WEF analysis of 15 multinational companies also found that operating profits caused by supply chain disruptions fell by a third in the quarter following 2011’s earthquake and tsunami in Japan.
  

• Geopolitical. A good example of geopolitical risk is terrorism. Since 9/11, the U.S. has spent $1 trillion tax dollars on homeland security. Maritime piracy is another growing concern—estimated to cost the international economy up to $12 billion per year. The International Maritime Bureau reported a 36 percent increase in the number of attacks in the first half of 2011.
  

• Economic. Disruptions of this type cover a huge range of issues, from currency fluctuations and demand shocks to export/import restrictions and supplier failings. Following the 2008 financial crisis, supplier bankruptcy filings in the automotive sector roughly doubled. On the positive side, a study by the World Bank concluded that enhanced capacity in global trade facilitation (from streamlined customs programs, fewer tariff and non-tariff barriers, and more-rational quota systems) would increase world trade of manufacturing goods by almost 10 percent.
  

• Technology and infrastructure. Forty one percent of respondents to the WEF survey stated that their companies have experienced disruptions as a result of unplanned outages of IT or telecommunication systems. And a report by CIBC World Markets estimates that, to avoid future supply chain disruptions, total infrastructure spending may need to reach $30 trillion by 2030.

Critical vulnerabilities
The WEF study group also sought to identify those vulnerabilities with the greatest impact on global supply chains, and the extent to which their companies successfully deal with those weaknesses.

Interestingly, four of the group’s top five concerns relate to visibility and control, and three of the five deal with managing multiple players and measuring their performance. Visibility and metrics clearly are a problem: More than one quarter of respondents to the WEF survey could not estimate the financial impact of disruptions to their business.