Growing Risks Require Resilient Supply Chain Risk Management Process

"There is general unease about the state of the global economy with its increase in operational risk," writes the staff at Material Handling & Logistics (MH&L).[1] That's why Adam Robinson (@TweetsByARob), Director of Marketing at Cerasis, asserts, "Supply chain risk management and resiliency are hot-button topics in the industry. ... As the supply chain continues to grow in complexity and regulation, the opportunities for problems and other events to impact operations negatively will consequently grow."[2] If you are wondering what tops the list of risks, Thomas K. Varney reports, "It will be no surprise to supply chain executives that business interruption retains its top spot for global corporate risks for the fourth year in a row. Rounding out the top five are market conditions, cyber incidents, natural catastrophes and changes in legislation."[2] While natural disasters, like hurricanes, tornadoes, earthquakes, and flooding, generally cause the most catastrophic disruptions, Oana Aristide, acting global leader at Dun & Bradstreet, told Varney, "The fourth quarter of 2015 was dominated by non-economic news, such as the Paris terror attacks and the continued refugee inflows into Europe, combined with the increased political resistance and sometimes controversial measures aimed at curtailing these inflows." Risks can come from unexpected sources. For example, earlier this year, "a monkey caused a nationwide power outage in Kenya. Millions of homes and businesses were without electricity."[3] Currently, there is concern about the political climate (including growing tensions with North Korea) and how political risks could disrupt supply chains. The point to be made is that supply chain risk management processes must monitor an increasing number of variables and understand the relationship between those variables if companies are to remain resilient. The more extended a supply chain becomes the more variables there are to consider. Two things should be obvious. First, supply chain risk management is a full-time operation. Second, in order to track, analyze, and understand all of the variables involved technology (preferably a cognitive computing system) is required.

With all of the potential risks threatening global supply chains, no one can fault supply chain risk management professionals if they sleep restlessly. Mark Quinlan, director of health care strategy at United Parcel Service, and J. Paul Dittmann, executive director of the Global Supply Chain Institute at the University of Tennessee, compare these professionals to the shipwrecked sailors mentioned by the Roman poet Ovid who wrote, "The man who has experienced shipwreck shudders even at a calm sea."[3] They add:

"Supply chain risk comes from a myriad sources and can be very hard, if not impossible, to predict. Risks run the gamut — from weather extremes, power outages, theft, counterfeiting, product spoilage, global crises, cargo lost at sea, truck or rail accidents, etc. The impacts can be costly — there’s an estimated $50 billion annual financial impact on cargo losses alone. ... Contingency planning is an area companies do not spend a lot of time (or resources) on based on the unpredictable nature of disruptions to the supply chain. Meanwhile, a [2016] survey conducted by the Business Continuity Institute and Zurich Insurance Group reveals that 76 percent of companies reported at least one supply chain disruption in the [previous] 12 months."

They further note, "Loss from supply chain disruptions can’t be eliminated, but it can be managed. ... As you work on contingency planning, look at the bigger picture and think holistically about supply chain and long-term business goals." Holistic thinking means you must consider both internal and external risks. Too often we think of supply chain risk management only in terms of external threats. Robinson reports, "Deloitte has identified many different risks that both Supply Chain and Logistics Directors must understand for effective supply chain management. However, most risks can be categorized into macro environment risks, extended value chain risks, operational risks, and functional risks." Using that framework ensures that both external and internal risks are taken into account. Deloitte defines those risks this way:

"Macro environment risks are broad external forces that affect the entire business and supply chain. For example, globalization gives businesses access to less expensive labor and materials — and opens up vast new markets. But it also increases supply chain complexity and magnifies the impact of disruptions that in the past might have remained locally isolated — such as natural disasters, political turmoil, piracy, and regional economic crises. This is probably the main reason 'black swan' events seem to be increasingly common.
Extended value chain risks center around a company's upstream and downstream supply chain partners. Increased use of outsourcing, for example, has improved efficiency and allowed businesses to focus more attention on their core competencies. But it has also made their operations more complex and exposed them to increased third-party risk. Similarly, supplier consolidation can be a double-edged sword. Although it creates economies of scale and makes day-to-day operations more predictable and consistent, it also increases the risk of major supply disruptions by putting all of a company's eggs in fewer baskets. Recent events have shown that if a critical supplier runs into quality problems — or its operations are disrupted by a labor dispute, natural disaster, or financial struggles — the resulting turmoil can send shock waves across a company's entire global supply chain.
Operational risks are tied to a company's internal product development, manufacturing, and distribution operations. Lean manufacturing, just-in-time inventory, and capacity rationalization have boosted supply chain efficiency and made businesses more agile and responsive. But by reducing the slack in the network, they have also reduced the margin for error and amplified the disruptive potential of whatever problems happen to arise.
Functional risks relate to the business functions that support supply chain activities, such as Finance, Human Resources, Legal and Information Technology. Today's supply chains are enabled and accelerated by a broad suite of applications and systems. Any disruption or breach in these critical systems can have an immediate impact on the customer experience. Also, the rising complexity of regulatory requirements – and increased repercussions of non-compliance – are making supply chains more dependent than ever on legal and regulatory functions."

Robinson insists that supply chain risk management shouldn't be left to a few professionals. "Risk management," he writes, "needs to permeate an entire organization from top to bottom." He adds, "Eliminating all risk is simply unrealistic. Risk exists in every part of a supply chain operation." Which is exactly the reason that risk management is everyone's problem. He suggests that an enterprise can become more resilient by increasing supply chain visibility, collaborating with stakeholders in real-time, and having a flexible response plan in place. A cognitive computing system can help with each of these areas as well as assure that industrial age information silos are removed as an obstacle. Quinlan and Dittmann note, "Companies using Big Data are able to better anticipate risks before they happen and prevent losses. Loss history databases are evolving to show losses by commodity, route, customer, package type, etc. Sophisticated mathematical models can help firms optimize their risk profile." Robinson concludes, "Risk is part of everyday life for supply chain entities, and supply chain risk management is one of the most important factors in overall effective supply chain management."

Footnotes
[1] Staff, "Global Supply Chain Risk Increasing," Material Handling & Logistics, 18 March 2016.
[2] Adam Robinson, "Logistics & Supply Chain Risk Management: Pivoting to Resiliency with these 3 Simple Processes," Cerasis, 23 February 2016.
[3] Thomas K. Varney, "2016's Top Business Risks: Business Interruption Remains Top Spot Fourth Year in a Row," Supply & Demand Chain Executive, 24 March 2016.
[4] Jennifer Lonoff Schiff, "8 Ingredients of an Effective Disaster Recovery Plan," IT News, 5 July 2016.
[5] Mark Quinlan and J. Paul Dittmann, "Risk Mitigation Should Be Part of a Healthy Supply Chain," Supply & Demand Chain Executive, 27 June 2016.

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