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Risk Management: Get By With a Little Help from Your Friends

May 1, 2014
The top three reasons why companies have adopted a risk management program are: • they've experienced a major supply chain disruption • they're instituting a corporate social responsibility program • a top tier supplier has had a supply chain disruption.

While the short-lived government shutdown last fall ended up being mostly an exercise in political theater, it did provide a prime opportunity for the Institute for Supply Management (ISM) to measure the effectiveness of manufacturers’ supply chain risk management programs. And while only 16% of the companies studied reported being affected by the shutdown, 85% of those who activated their risk management plans say they performed well.

The most widely experienced impacts of the shutdown, according to Paul Lee, research director of the ISM, were decreased sales, inability to access government data and lack of government inspections. (Somewhat ironically, the USDA’s Risk Management Agency was itself closed for business during the shutdown.) The inability to clear customs during the shutdown was also a significant stumbling block for companies, Lee adds. One-third (35%) of manufacturers who were affected said operations had returned to normal within one week after the shutdown ended, and 81% said that the situation was back to normal within one month.

Less than half (49%) of the companies impacted by the shutdown said they included the strategy of finding alternate suppliers in their risk management programs. That compares to 71% of non-impacted companies that do have such a strategy, which is considered a best practice for risk management. According to ISM, these strategies are those most frequently included in a risk management plan:

  • Find alternate suppliers
  • Talk with critical suppliers
  • Qualify more suppliers
  • Buy extra suppliers
  • Talk with major suppliers.

Supply chain risk management refers to “the proactive identification and assessment of potential risks to the supply chain, as well as the development of strategies to avoid these risks,” explains Lora Cecere, CEO of consulting firm Supply Chain Insights. Ultimate responsibility for supply chain risk management, according to a Supply Chain Insights survey, lies with a company’s top supply chain executive (43% of respondents), with another 37% of companies saying a C-suite executive (COO, CEO, CFO, or CIO) is responsible.

The top three reasons why companies have adopted a risk management program, Cecere notes, are:

  • they've experienced a major supply chain disruption (52% of respondents)
  • they're instituting a corporate social responsibility program (39%)
  • a top tier supplier has had a supply chain disruption.

When asked to rank the top supply chain disruptions of the past five years, respondents listed the 2013 government shutdown fourth, behind the 2011 Japanese tsunami, Hurricane Sandy in 2012 and the 2010 floods in Thailand.

“As supply chains continue to globalize, extend and increase in speed, the opportunity for something to go catastrophically wrong increases geometrically,” warns Simon Ellis, practice director, global supply chain strategies with analyst firm IDC Manufacturing Insights. But it’s not just the possibility of one huge event that manufacturers need to prepare for; risk management also includes monitoring the hundreds of little daily disruptions that taken together can seriously impact the health of your supply chain.

“It’s not enough to just strategically decide that you are going to improve your supply chain resiliency and risk management capabilities—the devil is very much in the details,” he notes. Companies should focus on recognizing their vulnerability to both external and internal forces, and then conduct a readiness assessment.

Large companies (i.e., those with an annual spend of more than $250 million) are significantly more likely to have a risk management plan in place than smaller companies, ISM’s Lee observes: 78% large vs. 66% small. While almost all companies say their risk management plans cover at least their critical Tier 1 suppliers, large companies are able to more broadly cover their suppliers through the second, third and fourth tiers.

As John Vogt, vice president of global logistics with oil & gas solutions provider Halliburton, points out, “The supply chain is the backbone of the global economy, and the supply chain is all about teamwork. When catastrophes occur, the biggest problem is the response time, so it’s important to plan ahead so you can react to anything that comes up.” It’s absolutely essential, he stresses, that you make risk management decisions that help your entire network, not just your company. In risk management, as in all things related to the supply chain, collaboration with all partners is key.

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