Your Supply Chain – One Bad Storm Away from Disaster?

One thing every business can agree on, the need has never been greater to safeguard supply chains against the unexpected.  Last year’s harsh U.S. winter, the Japanese earthquake and tsunami, unrest in the Middle East – and even fallout from volcanic ash that drifted over several European cities – were as good a wake up call as most businesses will ever see.   The fact that today’s supply chains are increasingly global lends even more urgency to the need to minimize risk wherever possible.

The good news is the unprecedented level of environmental and political developments that affected global supply chains, has cast a spotlight on the need for risk management.  As a result, several innovative ideas have surfaced, along with reminders about supply chain security that can help guide businesses looking to manage risk in their supply chains.

Logistics Management, for example, reported on several “game changing” non-conventional approaches including:

Enterprise-wide risk management (ERM): This approach requires a business to identify all potential risks throughout its organization, and to then assess those risks in terms of likelihood, impact, response required and monitoring progress.  As LM notes, the ERM model provides a framework that consists of eight elements:  internal environment, object setting, event identification, risk assessment, risk response plan, control activities, information-communication and monitoring.  The enterpise-risk model allows businesses to proactively identify risks, and have plans in place to manage those risks.

Scenario Planning using probabilistic methods: Although the concept of integrating probability into risk-based planning has been around for at least 50 years, it is only now making its way into supply chain risk management.  In its most basic form, this involves a business compiling a comprehensive overview of all potential risk – similar to the enterprise-wide risk management process described above – and then factoring in additional elements including historical patterns and uncertainty of all external factors.  After that, a business would develop “what if” scenarios, as a way to predict the impact of those external factors on their business.  This exercise allows businesses to better understand the impact of external factors on their businesses, to prioritize those risks, and to develop a corresponding response plan.

These strategies are intended to build upon a series of more traditional series of questions that a business must ask before undertaking a risk analysis:

  • Do our primary suppliers meet key financial stability standards?
  • Have we considered multiple source suppliers rather than relying on a single provider?
  • Should we select suppliers located closer to our customers, or to key manufacturing facilities?
  • Do we have alternate suppliers identified in case of emergency?
  • Do our alternative suppliers rely on the same transportation routes, power grids or materials manufacturers as our primary suppliers?

A study by Georgia Institute of Technology Professor Vinod Singhal and University of Western Ontario Associate Professor Kevin Hendricks found that it could take at least two years or more for companies to recover from a supply chain failure.  In addition, as noted in a recent white paper by FM Global, the professors found that businesses that experienced supply chain disruptions saw lower sales growth, higher costs and share price volatility.  These findings would seem to drive home what many businesses have learned firsthand – supply chain disruptions should be avoided at all costs.  And while it is impossible to eliminate all risk from the supply chain, it is possible to manage risk with good planning and forward thinking.