Viewpoint -- Four Key Steps in Coming to Terms with Risk

March 1, 2009
Developing flexible options is a winning strategy.

In the past 12 months, there has been no shortage of demonstrations of the many business risks American companies face -- product defects from Asian toys; gyrating fuel costs and worldwide food shortages -- to name a few. And, add a deteriorating economic climate to the mix.

Are events such as these an anomaly, or a portend of a new normal? It is the new normal, according to the collective view of 344 global companies' C-level and senior executive leaders who participated in a UPS/Economist Intelligent Unit Survey that looked at supply chain resilience and risk.

A key factor cited by four in ten of the survey's senior executives was that supply chain expansion and complexity have outpaced the ability to control risk. They echoed a thought of Nassim Taleb, author of The Black Swan, who said, "A flat world is over-optimized to maximum vulnerability." Yet in the face of such vulnerability, just one in six of the business leaders in the UPS/Economist survey said their firms paid proper attention to risk mitigation and supply chain resiliency.

Watching over so many layers of supply chain specialists spread across hemispheres in an era when even suppliers often operate their own global supply chains can be problematic. Not surprisingly, only two in ten of the business leaders surveyed said they could keep tabs over their entire supply chain.

Is there a solution to the survey's risk revelations beyond hope and a prayer? A gathering of supply chain senior executives and academic leaders addressed that question last fall. What emerged were four key steps aimed at gaining the upper hand on risk, developing a more resilient supply chain, and emerging from today's difficult economy in a fortified position.

  1. Make an Honest Assessment.

    Look at key points of vulnerability. Is there too much inventory flowing through a single port that's subject to bottlenecks? Perhaps there's too much reliance on a transportation mode that may be vulnerable to a strike or natural disaster. Or, maybe there's too much dependence on a sole manufacturing site. What if there's a fire? The key is giving priority to those supply chain points that can cause real pain.
  2. Develop Flexible Options.

    Once the focus has narrowed, the next step becomes developing flexible options. In the port example, that could be setting up alternate entry points at less-crowded ports. For fashion industry or holiday goods producers, options may involve more multi-sourcing and near-sourcing at interchangeable, cookie-cutter regional hubs. These regional hubs also could take over production from another site in an emergency. (Thirty-five percent of the survey participants said they intended to do more near-sourcing.) A growing number of industry leaders -- like retailer Amazon -- use advanced data analytics to determine the most strategic locations for distribution centers.
  3. Ensure Visibility Across the Supply Chain

    Visibility through shipping software technology is essential. Especially in today's uncertain times, manufacturers and retailers must know the status of freight and packages throughout the order cycle -- whether goods are in the air, riding the highways or rails, or sailing across oceans.
  4. Forge Trusted Partnerships with Financially Strong Logistics Providers

    Logistics partners should have the ability to provide seasoned feet-on-the-street supplier management pros, to fill in any visibility black holes, and to implement a holistic supply chain strategy. But that's just part of the bigger picture.

In addition to generating profits, regulators, consumers, and investors are increasingly demanding that corporations do so through both positive environmental and social means. Nearly half the survey participants plan to step up the integration of sustainable social and environmental practices into their supply chains. They must further ensure that their partners follow suit on some level.

These four steps not only represent a solid approach for defending against risk, but also provide a strong foundation to ensure business continuity, profitability, and competitive advantage. No business today can successfully operate without those principles -- for long.

Dan Brutto is President, UPS International. UPS, is the world's largest package delivery company and a global leader in supply chain and freight services. The company serves more than 200 countries and territories worldwide and operates the world's 9th largest airline.

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