Mitigating Risk through Best Practices

A five-point strategy for supply chain risk management


  • Market volatility. Despite the best efforts of your marketing department, customer demand for your products and services varies beyond your control. Determined by market pricing, availability, competition and consumer trends, demand for a product can disappear overnight, leaving obsolete inventory in the hands of manufacturers and retailers.
  • Macroeconomic factors, such as economic growth, interest rates, currency fluctuations, fuel prices and energy costs. Nobody would have dreamt of $100 per barrel oil two or three years ago; now $150 barrels are a possibility, and those prices affect product costs in all the economies of the West.
  • Government legislation. According to the same independent study referred to earlier, 82 percent of supply chain executives admitted to spending up to 52 days per year coming to grips with the latest legislative orders, with 58 percent being "concerned" or "very concerned" about operating in an increasingly regulated environment. They are right to be concerned. Failure to comply is expensive and puts customers, your brand and ultimately your company at risk.
  • Natural disasters. While most people think of major freak weather events such as hurricanes and earthquakes, this category also includes a large number of "everyday" occurrences that nevertheless can have a severe impact on supply chains, such as local droughts, floods and disease. These can severely affect crop availability, quality, market price and sourcing options for companies that rely on affected materials for their supply chains.

Solutions

In extreme cases, these internal and external risks can take companies down. To avoid being knocked off balance, companies try to alleviate these considerations through risk management strategies. If trouble comes and you're well prepared, not only do you inoculate your company against the risk, you open opportunities against competitors that had not perceived the risk. Here are five strategies that can help immunize your supply chain against these kinds of risks:

    1. Make every employee a risk manager. Enterprising companies in every industry are empowering their employees to proactively manage risk. Managers should be conscious of sources of risk and how to detect it, and they should integrate this knowledge into their daily practices. Overly bureaucratic and complex processes tend to submerge risk management. Managers need the flexibility to use techniques that make sense for them and their operation. Employees should also view unexpected events as opportunities as well as risks. For example, a larger-than-expected sales order demand will have an impact on planned stocks and production, but if coordinated with warehousing and logistics, this kind of event provides a great opportunity for increased revenues and enhanced customer satisfaction.
    2. Detect unplanned disruptions to your supply chain in real time. Most companies use key performance indicators (KPIs) at the corporate level as a way to identify supply chain disruption and take appropriate action. However, similar to trying to drive a car by looking in the rear view mirror, KPIs only provide insight into past performance. By the time the KPIs are reported, the data are usually a month old and no one can uncover the source of the original problem. Smart alerting technologies constantly seek out and monitor unplanned events anywhere in your supply chain (late deliveries, inconsistent or missing data, bigger than expected orders, stock right-offs). You are notified immediately if something goes off track. In supply chain terms, a "stitch in time" is critically important to avoid small issues that could grow into big, costly events.
    3. Provide a foundation for employees to collaborate and share knowledge to resolve risks. Combined human knowledge always provides greater insight than systems alone can provide. Individuals know about the big orders due next week, the likelihood of market price increases, competitor promotions and their impact, and the tanker that just went down with your shipments on board. Collaborative technologies reach out to your internal employees and external business partners, gathering information and improving transparency into and across your supply chain.
    4. Proactively measure performance and mitigate risk through continuous business process optimization. Risk management is a dynamic business process. Combining collaboration with alerting technologies allows companies to act immediately and improve the chances of detecting the source of the problem and eliminate the underlying source.
    5. Scenario planning. What changes would you make to your supply chain network if you had a crystal ball and knew the price of fuel in six months time? The level of "green" taxation that might be applied to your products? The crop yield of your key ingredient at the end of the season? The price of energy next year in all your plants around the globe? Knowing this, how many would revisit the very design of their supply chain network, source materials from different countries, perhaps even reverse the conventional wisdom of outsourcing to the Far East, saving on manufacturing costs but at much increased transportation expenses? Obviously, none of us has a crystal ball. But simulating your supply chain can evaluate your sensitivity to such eventualities and help you establish contingency plans. Forewarned is forearmed in supply chain strategic thinking.

Conclusion

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