Managing Risk in the Global Supply Chain
June 04, 2014 - SCMR Editorial
Editor’s Note: J. Paul Dittmann, PhD, is Executive Director, Global Supply Chain Institute The University of Tennessee, Knoxville. The complete whitepaper can be downloaded at gsci.utk.edu
Risk in the Global Supply Chain
The supply chain arguably faces more risk than other areas of the company due to its global nature and its systemic impact on the firm’s financial performance. Risk is a fact of life for the supply chain professional due to the long list of forces that drive supply chain risk. These include quality and safety challenges; supply shortages; legal, security, regulatory and environmental compliance; weather and natural disasters; and terrorism. Companies with global supply chains face an addition potential for risk, including, but not limited to, the longer lead times needed in the global environment; supply disruptions due to global customs, foreign regulations and port congestion; political and/or economic instability in a source country; and changes in economics such as exchange rates.
The scope and reach of the supply chain cries out for a formal, documented process to manage risk. But without a crisis to motivate action, risk planning often falls to the bottom of the priority list. The low priority for managing risk in companies is puzzling. After all, supply chain risk management is a very popular topic at conferences and has been written about extensively in books and articles. However, in spite of all of the hype and discussion, we still see the vast majority of companies giving this topic much less attention than it deserves.
But there’s a silver lining. Risk cannot be eradicated, but it can be planned for. Having a risk management plan can even be used as a competitive advantage, since so few firms have one. Preventing disruptions down the supply chain dramatically impacts competitiveness in general. The repercussions of supply chain disruptions reach far and can devastate the financial health of the firm. An effective risk management process for the supply chain can help companies avoid missed customer commitments, stock outs, reduced earnings, higher inventory levels, increased time-to-market cycles, reductions in product quality, and negative impacts to brand perception.
The Survey Says…
We conducted a survey of the state of supply chain risk management today, obtaining input from over 150 supply chain executives across industry. In addition, we completed in-depth face-to-face meetings with six companies.
The survey data allow us to make up-to-date observations on the following topics:
Facility Loss and Backup Plans
Supplier Loss and Backup Plans
Supply Chain Risks
- Risk Mitigation Strategies
Facility Loss and Backup Plans
If a natural disaster or major equipment failure shuts down a company facility (a factory or distribution center), about half of the firms surveyed (53 percent) have a backup plan that can be implemented fairly quickly. The bad news is that the other half (47 percent) do not have a backup plan for factories or distribution centers.
About seven in ten companies (69 percent) have a documented response plan in place to attempt to salvage business with their customers if disaster strikes, either through product substitution, proactive communication, or with inventory. This means that almost a third of companies do not have any disaster response plan in place for supply chain risk.
Supplier Loss and Backup Plans
On average, about 45 percent of the suppliers of the firms surveyed could continue to supply if they suffer a disaster in one location, meaning that over half (55 percent) could not continue supplying within a reasonable time frame.
The survey said that nearly half (45 percent) of supplier spending for U.S.-based companies is outside the United States, with 21 percent in Asia. Of course longer supply lines increase supply chain risk.
Firms vary widely in terms of how many of their suppliers are sole sourced. In this survey, 38 percent of suppliers are sole sourced. But the spread is very broad. At just one standard deviation, the range for sole sourcing among the firms surveyed was 13 percent to 63 percent. It can be safely said that many firms take on the risk of sole sourcing with a relatively large number of their suppliers. Some do this for economic reasons (one supplier has a significantly lower cost and/or higher quality), for practical reasons (no other supplier can satisfy the company’s needs adequately,) or unfortunately for relationship reasons (“we’ve always done business this way.”)
Supply Chain Risks
The number-one risk on the minds of survey participants concerns potential quality problems. Long global supply lines make it very difficult to recover from quality issues. Next in the list of risk concerns is increased inventory due to a longer global supply chain. Companies say they carry at least 60 to 75 days of supply in additional inventory when they elect to outsource to Asia. Inventory was not a major concern when companies rushed to Asia 20 years ago,. But the huge amount of additional inventory caused by a long global supply chain dismayed many of those who didn’t fully appreciate this impact in advance. Most firms now understand that inventory increases working capital, which depresses cash flow, which depresses shareholder value. Supply chain professionals find it extremely difficult to achieve the aggressive inventory goals given to them by the CEO/CFO when they have to contend with extremely long global supply lines.
The third ranked risk is that of natural disasters, perhaps brought top-of-mind with high-profile natural disasters, such as those in 2011 (e.g. the Japanese tsunami and Thailand flooding.)
Supply chain professionals are least concerned about terrorism, piracy, and customs delays. Firms have gotten a lot savvier about dealing with customs issues. They are taking full advantage of every program that speeds customs processing, such as C-TPAT in the United States.
Risk Mitigation Strategies
The number-one strategy used to mitigate supply chain risk is to choose financially strong, competent, world-class suppliers. This is easier said than done. Firms tell us that it takes approximately two years to develop and fully certify a global supplier.
Following that is a focus on compressing global shipping time and cycle time variation. Leading firms apply Lean principles and Six Sigma techniques to this effort. They value stream map the end-to-end global shipping process and look for ways to reduce or eliminate waste and delays at every step.
The third-ranked strategy used to mitigate supply chain risk involves the use of visibility tools to closely track global shipments and take action when necessary. Leading firms use supply chain event management technology to send alerts to key personnel when action needs to be taken by someone, somewhere in the global supply chain, to correct delays.
Supply chain risk cries out for a process to manage it. Your supply chain strategy team should set aside time to evaluate the risks facing your supply chain. Once you and your team identify the risks facing your supply chain, you must next prioritize the risks. Regardless of a company’s size and geographical scope, there is no shortage of methodologies to help prioritize risks. In the final step of a risk management process, mitigation plans need to be developed for the top risks. The line organization should be deeply involved in and own this part of the process.
In summary, it should be clear: supply chain professionals cannot afford to delay fortifying their supply chains against disaster; they must take advantage of the information and tools available now to ensure continuity and resilience for the long-term.
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