Mitigating Risk through Best Practices

A five-point strategy for supply chain risk management


By Andrew Kinder

As companies have become more successful at operating lean, mean and increasingly global supply chains, the risks of disruption from factors inside and outside of their control have grown exponentially. Sources of risk are everywhere, from natural disasters such as Katrina-style hurricanes, to geopolitical unrest, to unpredictable market forces that affect market prices, demand, supply and the ability to grow a profitable business. And yet, in an independent study of 100 top supply chain professionals, a third of the executives admitted that they do not have a risk management strategy in place for their supply chain.

This article investigates some of the sources of risk faced by supply chain professionals and examines key strategies and emerging technologies to help companies build "chaos-tolerant" supply chains. Broadly, sources of risk can be categorized into internal and external risks, with different strategies to mitigate each. Both are discussed, along with a five-point strategy plan for managing risk.

Internal Risks

Internal sources of risk are those you can influence and control — the physical resources and business processes that are within your organization. These include your physical assets of manufacturing, distribution, transportation, people, money and the efficiency with which you manage and orchestrate these to profitably service your customers. Sources of risk are many and varied and include some or all of the following:

  • Product quality from brought-in materials right through to finished products. Poor control here leads to lateness, customer dissatisfaction, unplanned remedial work and potentially legislative breaches.
  • Asset productivity — the ability to plan and coordinate your materials, production and people assets effectively to meet customer demand. Disruptions in these areas cascade and magnify throughout the supply chain, resulting in unprofitable and uncompetitive business models. The linkage between supply chain excellence and business performance is exemplified by AMR Research's finding that the top 25 supply chain performers "outperformed the market for the third year in a row."
  • Data integrity across multiple systems. This is a key source of risk. Often products may be missing key data elements that cause problems later on, such as components of their bill of materials, cost information, pricing and supplier codes. Because products today pass through more parties, geographies and systems on their way to the consumer's hands, the opportunity for data problems has never been greater.
  • Lack of visibility. Hundreds of products comprised of thousands of piece parts traveling to all points of the globe by any conceivable means of transport make transparency in the supply chain difficult to attain and a major source of risk. Supply chain professionals always feel particularly uneasy about what they don't know but wish they did.

Mostly, the internal risks are what best practice supply chain management business processes are designed to address. Enterprises that leverage these best practices, along with a range of available technologies such as demand and supply planning, warehouse, transportation and product lifecycle management, can go a long way toward understanding and mitigating their exposure to these kinds of risks.

External Risks

While many companies are practiced at managing their internal supply chain because they own the resources, the external sources of risk are outside of their control and too often dealt with reactively rather than proactively.

External risks to supply chain continuity include many of the following:

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