The New Game of Supply Chain Risk Management

For all of its clear benefits and amazing advances, 21st century life is undeniably complex.

No one knows this better than corporate executives who rely on a chain of suppliers to deliver the goods and services they need to meet customer demand. The journey from source to destination contains risks and uncertainties, perhaps more today than ever before.

Changes on nearly every front have dramatically altered supply chain dynamics, adding many potential points of failure. Today, companies source supplies and produce goods throughout the world. Customer expectations continue to rise, and their satisfaction in large part hinges on the supply chain's reliability. Information and communications technology continue to push the envelope. Commodity prices are highly volatile. The only constant for many it seems is change.

Consequently, today's supply chain is an interconnected network or web of two-way relationships—with operational risks in every link. Risks in any one link affect the rest of the chain and its connection points.

To understand and manage the risks in this new interconnected supply chain, companies need one thing above all: a holistic view of risk across the enterprise.

Without that overview of risks, the consequences can be costly. They range from mild customer inconvenience to a disaster that can damage the business and even bring it to a halt, jeopardizing its continuity.

Siloed Infrastructure

Critical as it is, supply chain risk is often precariously undermanaged at many companies. Although risk management was recognized in the midst of the financial meltdown of 2008 as an area where companies needed to improve their capabilities, supply chain risks are not fully accounted for at many companies.

Even companies that make serious efforts to manage supply chain risk often approach it in siloed parts: procurement, logistics, distribution or manufacturing. What they miss is the network-wide view that would enable them to recognize similar risks that should be managed from a company-wide perspective.

To stay ahead of the risks, companies pushing for high performance are taking more risk-adjusted approaches to their supply chain management.

Some companies, especially those in consumer goods, are evolving new operating models to help address risk. They are scrutinizing global vs. local processes to determine which functions should be centralized and which should be managed locally, with guidelines, given the risks.

Robust and sophisticated vendor management is another corporate response to higher risk in the supply chain. Rather than rely on one supplier, dual or multiple sourcing as well as a tiered approach to suppliers is used especially for critical components. And, to keep ahead of any changes in the risk profile, vendor information is kept up-to-date and communication is kept continuously open.

The point is not to avoid risk. All business activities have uncertainties attached to them. The key is to understand, manage and mitigate those uncertainties and risks in the supply chain in a smarter, more informed way.

Supply chain risk management then should establish effective mitigation strategies all along the value chain. Managing supply chain risk is a business issue, not a standalone concern.

Coping and Competing

Companies can best accomplish this objective with the following three-pronged approach.

1. Assessing the Risk: First, define the supply chain and its components. Consider third-party vendors and counterparties. Understand who the supply chain partners are. What is their operational and financial risk profile? Understand what happens if a vendor fails to deliver raw materials. Reliable delivery depends on the vendor's financial condition and their risk management processes. It's imperative that a company clarify this overall risk picture if they're to effectively manage the company's risk exposure.
2. Design a Framework to Manage the Supply Chain: Once assessed, supply chain risks must be managed via a framework that integrates all of the key risk capabilities required for enterprise-wide, risk-based decision making (see sidebar).

3. Implement Supply Chain Risk Mitigation: With the groundwork laid, a company is then positioned to implement its action plan, which is designed to address risk issues and treat underlying problems. The action plan's value is realized when it gives direction to supply chain risk management, and becomes part of the fabric of the company.

Although supply chains have always required managing uncertainty and risk, today that risk component has a never-before seen impact on the ability of the company to achieve its goals. With the right supply chain risk mitigation processes in place, risk management can contribute to a company's overall profitability and ultimately make the business more resilient as it encounters threats to its operations.

The right approach to supply chain risk management should help a company prepare for the unknown, offer contingency plans and give the business an edge over the competition. Supply chain management has always entailed the management of uncertainty and risk. Today, the need is more acute than ever, and it requires supply chain and risk managers to team like never before to achieve greater resiliency.

For a more in-depth read about supply chain risk management, click here.

For more, watch Michael Chagares' video interview with Business Finance, Keeping Ahead of Supply Chain Risk ,and read Q&A: Managing Supply Chain Risk with Eyes Wide Open.

Michael Chagares is executive director of Cross-industry Risk Management services at Accenture, a global management consulting, technology services and outsourcing company.