Successful Risk Management Begins with People and Process

How to more effectively manage risk by viewing the supply chain as an integrated corporate function.


Supply chain management has long been viewed as essential to business operations, but many companies have not invested in the people and tools necessary to implement effective and sustainable processes. Quite often, this is the result of limited resources – dollars and personnel – allocated to the supply chain, which historically has been considered a tactical versus a strategic function.

But to address the risks and rewards that come from increasingly complex and global business models, companies need to approach supply chain management as more than an isolated necessity, and instead view it as an integrated corporate function providing strategic benefit to the entire organization.

Managing Supply Risk

Regardless of previous investments, one's stage in the supply chain evolutionary process or the perceived need for a robust supply chain solution, companies should recognize at a minimum that the changing business environment has increased the significance of supply chain performance within core operations. While opportunities exist for companies to effectively leverage their suppliers, this has also introduced additional risk that should be identified, evaluated and managed.

Historically, the most common solution to managing supply risk has been redundancy – identifying and qualifying a combination of suppliers. Even when a supply risk management program is in place, it frequently is focused on supply disruptions associated with a single supplier or a single point of failure, instead of addressing the potential for more widespread disruptions from events like geopolitical issues or natural disasters. This is compounded by ongoing supply consolidations and increased dependence on low-cost country (LCC) suppliers, which present different risks than developed countries.

While it is tough to get past the human impact of a natural disaster, these events create profound global supply impacts. Within two weeks of the Japanese tragedy, auto manufacturers announced production impacts because of a disruption in electronic components. While electronics are often associated with Japan, less obvious impacts are now beginning to surface. For example, Ford announced that it will temporarily suspend production of trucks and large SUVs in select colors because the pigments are sourced from Japan and are in short supply.

As part of a supply risk plan, companies should evaluate potential risks throughout their supply chains by identifying both direct and indirect points of impact associated with parts, service and manufacturing. They should also consider the impact on transportation channels and on those items needed to rebuild after a catastrophic event.

This plan also should evaluate the financial health of core suppliers to understand the probability of an impact. While revenue and credit ratings are important measures, they are generally lagging indicators and may not effectively provide a view into companies' short-term financial health.

Trending the results of a quick or current ratio in combination with revenue and working capital can provide a comparable point of reference to help evaluate the ability of a supplier to continue meeting its obligations. It is important to remember that bankruptcy is a result of cash issues, not a reflection of revenue. Historical data can help, but a forward-looking view to proactively manage supplier risks is essential.

Far-reaching Impact

The actions and activities of the supply chain organization have far-reaching impacts not generally considered. One such area is accounting risk. Each year, the accounting departments of public companies request a list of contingent obligations in an attempt to meet the financial statement disclosure requirements, but even if this request is completed, it may not fully address all the requirements.

Assume for a minute that the supply chain organization enters into an agreement that does not address, or even exonerates, a supplier's liability associated with a potentially material event, where the probability and financial impact can both be reasonably estimated.

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