Supply chain risk management — identifying, assessing and controlling threats to the effective operation of the…
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supply chain — is an increasingly important concern as new threats are identified and managers become more aware of the potential impact of disruptions.
Below is a list of factors that should be considered in any supply chain risk assessment.
1. Supply chain length
An inevitable complicating factor in supply chain risk assessments is that, the longer the supply chain, the more risk.
Today’s supply chains tend to be more complex and more global than at any time in the past. Risk of disruption grows along with the length of the chain. Each time goods are handled — packed and loaded, transferred from one mode of transport to another, unloaded or combined with or separated from other shipments — there is the opportunity for damage, theft, delays and loss.
When analyzing the cost trade-offs between local or domestic sourcing and international supply, be sure to factor in the additional risks of the longer chain. International procurement also entails risk from currency fluctuations, changing duties and taxes, unstable government or political considerations, volatile fuel costs and customs delays.
2. Efficiency’s risk
The more efficient the supply chain, the more risk it carries. In earlier times, when business was comparatively less competitive, the default risk mitigation strategy was having some extra inventory staged along the supply chain to soften the impact of delays and disruptions.
Today’s focus on efficiency has removed much of that inventory buffer. Now, a plant explosion in China or a dock strike in California can shut down an assembly plant in Iowa in a matter of days.
3. Cyber-risks and other disruptions
Risk doesn’t necessarily mean goods are lost or destroyed. It’s easy to visualize physical disruption of the supply chain — a plant burns down, a container falls off of a ship in a storm, a truck is involved in a highway crash — but there are many other risks that threaten the continuing health of the chain and the businesses that rely on it.
Intellectual property can be stolen by a competitor that results in unfair competition and lost market share. Your computer and communications networks can fail, be corrupted or compromised. Lawsuits can shut down your business over liability claims, intellectual property disputes, unfair labor practices or unsafe working conditions (including those of your suppliers’ suppliers). In addition, employee misbehavior and many more undesirable and devastating things can happen.
4. Alternative risk strategies
Risk avoidance and mitigation are not the only strategies. During a supply chain risk assessment, newcomers might think that their only recourse is either taking action to avoid or reduce the risk or to otherwise limit the impact of the risk. It’s true that these are the most obvious and most effective strategies, and the ones that should be pursued first, if practical (more about that below).
But sometimes, there are ways to share or offload risk on another party and, sometimes, the solutions are worse than the problem. The next two supply chain risk factors delve into these two alternate strategies when avoidance and mitigation are less than ideal solutions.
5. Supply chain risk transfer
Some supply chain risk can be transferred. Transfer of risk reduces or eliminates the financial impact of a supply chain disruption, but may not adequately address the business continuation issue.
Risk transfer can be an insurance policy that repays the company for the cost of repairing damage, replacing lost equipment or goods, and even the loss of revenue and profit caused by a covered event. If the warehouse is destroyed by fire, insurance can pay to repair and restock the warehouse, and maybe even pay for the lost business during the disruption. But it is unlikely the insured company can be compensated for the loss of customer loyalty, the advantage that agile competitors may gain from stepping in to help those customers and other long-lasting effects of your absence from the market for that period of time.
6. Cost-benefit analysis
Sometimes, you just have to accept the supply chain risk. Risk avoidance and mitigation have a cost, and that cost can be prohibitive — that is, higher than can be rationalized. Risk management professionals always do a cost-benefit analysis comparing the cost of mitigation or avoidance against the likelihood and impact of the disruption, should it occur.
Sometimes, you just have to accept the supply chain risk.
If the cost is too high, the company may decide to just accept the risk — you can think of that as a type of self-insurance. If the disruption does occur, the company will repair the damage and get back to business as quickly and effectively as they can, and be satisfied that the money was well-spent, as it was less costly overall than the prevention measures that were considered and rejected.
7. Insurance issues
Among supply chain risk factors, it’s important to remember that the best insurance never pays off. The odd thing about insurance, whether it is the conventional kind, where you pay a premium, or the risk avoidance and mitigation costs being discussed, is that it is most beneficial when the disaster doesn’t occur, and you never see the payback.
But isn’t it better to not have the disruption in the first place? Of course it is. The problem is that executives and financial accounting systems are conditioned to look for direct payback from investments and expenses. This makes insurance payments, including risk avoidance and mitigation costs, more difficult to justify and sell to business leaders.
Nevertheless, supply chain risk is real, it definitely threatens the continuing operation of the supply chain and the health of the business, and the cost of avoidance and mitigation are easily justified (in lost cases) when taking a good, hard look at the impact those risks can pose to the business.