Supply Chain Risks

A quotation from Harold Sirkin, Vice President of the Boston Consulting Group: "As the economy changes, as competition becomes more global, it's no longer company versus company but supply chain versus supply chain." This quote resonates well with enterprises that are globally diversified as they step into the global environment trying to emulate the Wal-Mart’s and the Dells.

One of the top concerns that companies have been preoccupied - is evaluating the risk assessment of their complex supply chains. A fall out in the supply chain can have devastating effect on the bottom line of the company and the recovery process can be very time consuming. When hurricane Katrina hit the Louisiana coast, a significant number of refineries were affected which resulted in an immediate increase in the price of gas. "Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement," as quoted by William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich. Companies need to cope with such uncertainties in their supply chains and should develop strategies to mitigate any supply chain disruption risks. No longer can cost reduction activities can be implemented in isolation cause it may increase the risk of the supply chain e.g. the decision to outsource manufacturing to low cost countries requires balancing competing priorities of increased inventory/lead times while heavily dependents on the logistics efficiency and total cost of ownership.

In the current environment the principal threats that companies are besieged with are supplier disruption, natural disaster, strategic risk, political risks, compliance and logistics failure. Supplier risks can range between prices control, supply variability, supplier company stability, and lead times among others. Supplier disruptions risks are usually the highest priority across all industries. Natural disaster risks are a top priority for the chemical and the oil and gas industry where most of the refineries are based around the coastal areas. Pharmaceutical companies also consider risk evaluation studies for disease control after natural disasters. Strategic risk evaluation is critical for companies in the High Tech space where the product life cycle is very short. Companies have to make good strategic investments and understand the market for consumption or reaction of the introduction of a new product. The aerospace and defense industry, construction and the oil and gas industry are primarily susceptible to political risks. As political climate changes in the war, terrorism, dictatorship ridden economies – it affects the entire global economy. Compliance from financial regulations to SOx based compliance is also critical for Pharmaceutical and other industry where traceability of their product has to be determined in case of recalls. Retail industry and the advent of outsourced manufacturing in other industries are placing a lot at risk on the logistics and movement of goods.

Companies can take a four pronged approach to mitigate supply chain risk strategies. The first element for a company is to understand the strategic implication of their supply chain. A classification of products or categories may provide insights to material risk profiles that can degrade the operational performance. Diversify the procurement across few but multiple suppliers that can hedge the company against supply disruption. Manufacturing capacity can also be analyzed to meet the global/regional demand. A flexible supply chain should be designed which can buffer against uncertainties through strategic lean six sigma thinking. The second element is to create a collaborative and cooperative manufacturing and supplier network. Continuous visibility of metrics and constant communication/collaboration will enable companies to be proactive and reduce the impact of disruptions. Supply chain risk managers have to frequently work with colleagues from other departments such as purchasing, logistics, maintenance and quality to proactively create risk mitigating strategies. The third element is the ability for companies to consider and analyze the tradeoffs during decision making addressing the root causes and not the symptoms. Companies have to understand the difference between the service levels and cost reduction strategies that could negatively affect the operational performance. The last element is to show relentless passion for risk elimination. Create analyze and use up the company brainpower to come up with metrics and strategies for quantify the risk and implement risk mitigating strategies. Supply chain risks have become deeply embedded into the fabric of extended supply chain network. If neglected, it can have devastating effect on the supply chain – as quoted earlier the battle is not between enterprises but between supply chains.