Any risk to an organization’s supply chain puts the entire financial health of the organization in trouble. Supply chain risk management is a critical requirement, largely because failure to manage risk can be so devastating to the bottom line.
It is important that the organization has robust processes in place to identify, rank and manage the risks that have the potential to disrupt its supply chain. Despite the highlighted importance of identifying and mitigating risk as part of the organization’s supply chain strategy, the majority of firms engaged in global outsourcing strategies are still lacking in their supply chain risk management capabilities.
Recent global supply chain disruptions such as the Iceland Volcano Eruption of 2010; earthquake, tsunami and successive nuclear crisis that overwhelmed Japan or floods in Thailand of 2011 and the 2013 Bangladesh factory collapse on garment, just to mention a few, have caused some companies to experience stock-outs, reduced earnings, higher than normal inventory levels, increased time-to-market cycles, reductions in product quality, reduced operational income, lower shareholder returns, higher share price volatility, reduced return on assets and negative brand reputation.
As companies increasingly continue to outsource globally, supply chain risk management should become part of the strategic planning process. Business leaders should take enough time to study and consider global market trends, consider various disaster scenarios capable of disrupting the organization’s supply chain and then decide how much risk to take on globally. A good supply chain strategy is able to identify the various potential supply chain risks, evaluate their impact on business performance and develop risk mitigation plans.
Unfortunately, when making and analyzing global outsourcing and sourcing decisions, companies make one big mistake. That is, they only consider unit cost, transportation and inventory as part of their assessment. Risk assessment and contingency planning are not part of the game. These companies are failing to formally analyze and quantify risk in making their outsourcing decisions. As the global economic environment continues to be interconnected, firms will continue to outsource and the risks associated with outsourcing will become more profound. Companies including formal risk assessment in their global supply chain strategies are better position to sail through in difficult times and mitigate those risks that affect all global supply chains.
Whether local or global, supply chain risks (supply risks, demand risk and operational risks) must be identified, prioritized and mitigated. The starting point for business leaders when it comes to identifying and prioritizing risks involves first creating a basis that allows them to view these risks in perspective. It is also important to determine the organization’s customers’ needs, evaluate internal best practices, consider global supply chain trends and evaluate the organization’s competition and technology.
Risks affecting the supply chain can be prioritized by evaluating the seriousness of their impact, their frequency of occurring and the prospect of early detection of the problem. Prioritizing risks helps establish those risks which require a mitigation plan and those that have very minimal impact and/or warrant little or no effort.
Having identified and prioritized supply chain risks, companies must determine ways to manage these risks. For example, the company can use postponement, security, hedging, speculation, avoidance, and risk transfer or sharing techniques. By addressing risk, companies have a much greater chance to anticipate damaging supply chain disruptions and protect themselves from the resultant negative outcomes.