This is a contributed op-ed written by Jon Kirchoff, PhD, a professor of marketing and supply chain management at East Carolina University.
Risk is ubiquitous within supply chain management in today’s global business environment. As firms continue to extend supply chains across the globe, their exposure to more and varied risks increases, as does the probability of disruptions and associated costs, estimated to be in the tens of billions of dollars per year.
This risk is not relegated to certain sectors of the economy, either. According to Deloitte, 84% of surveyed organizations across industries reported a major global supply chain disruption in the past 12 months. Heightened awareness of the potential for, and costs related to, supply chain disruptions has pushed risk management to the forefront of corporate strategy. Yet despite this increased attention, firms continue to struggle with identifying the best strategies to define, assess and mitigate risks in their global supply chains.
The primary challenges to supply chain risk management are twofold. First, managers struggle to identify which risks have the potential to be the most impactful in terms of cost, time and reputation. Nearly every aspect of firms’ global supply chain operations carry some form of risk; managing them all would be cost-prohibitive and impossible to administrate. Second, the steps needed to address supply chain risks are often not apparent or understood. Firms can become paralyzed and make poor decisions, or worse, none at all. So how should managers proceed?
Supply chain risk management is daunting, and in many cases, firms simply do not have the expertise, wherewithal or energy to actively manage risks.
To answer this question, let’s start by identifying the leading global supply chain risk facing firms today which, according to industry and academic experts, is globalization itself. Globalization can complicate a business model, as evidenced by the challenges and risks associated with trade wars and border issues. It also increases risks associated with global supply chain disruptions, both natural (e.g., force majeure events such as earthquakes) and man-made (e.g., terrorist activity and cyber-attacks). Finally, global supply chains are longer, leaner and involve more complex relationships with a wide variety of suppliers. These factors can expose firms to interruptions in supply, delays, stock-outs, quality problems and supplier management issues. I suggest four steps to effectively and efficiently manage these risks.
Managers first need to identify which globalization risks can be addressed quickly with little cost in the short run and which will take longer to implement and have higher costs. This idea can be translated into a “cone” of risk, whereby risks are divided up by the time needed to address them (days or weeks, months and years), and the resources needed in terms of planning. In this way, near-term planning commits resources for a quick turnaround while long-term planning commits greater resources but addresses the larger problem.
Second, managers need to move from a reactive, operational approach to supply chain risk management and instead pursue it in strategic, proactive terms. Ad hoc solutions do not consider root cause analysis or the long-term impact of supply chain disruptions. An operational approach is fine for a quick turnaround, but a strategic approach to risk management addresses the immediacy of impact and prepares firms for the future.
Third, managers should employ a useful tool in the form of a basic equation of supply chain risk: the probability of the risk occurring multiplied by the impact or cost of the risk to the business. So, while the risk of force majeure may have a low probability of occurring, e.g., Japan’s tsunami of 2011, the impact or costs to the affected supply chains are nearly incalculable. Conversely, while the risk of shipping delays in a lean supply chain is not uncommon, the impact is often relatively low and short-term.
Finally, managers need to work with their supply chain partners to develop and implement risk management strategies. Firms often do not have full visibility of their end-to-end global supply chains, and cooperation and coordination with suppliers and customers are critical. To that end, new technologies such as blockchain show promise to better connect members of the supply chain and improve trust and transparency.
An operational approach is fine for a quick turnaround, but a strategic approach to risk management addresses the immediacy of impact and prepares firms for the future.
By following these steps, managers will benefit in several ways. First, risk management will become easier (yes, easier!) because the system will allow managers to anticipate disruptions and move to mitigate them before the impact is inevitable. Second, the impact of supply chain risks may be less severe and free up resources as a result. Finally, firms will find themselves more resilient, as recovery will be faster and less costly.
Supply chain risk management is daunting. In many cases, firms simply do not have the expertise, wherewithal or energy to actively manage risks. However, with strategic planning and by following the steps outlined here, managers can better manage global supply chain risks to mitigate and even diminish their overall impact.
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