Life used to be so simple! After the oil price shocks of the 1970s, but for the occasional recession, periodic fall-off in customer demand, inflation, currency fluctuations and industrial unrest, supply chain management was a straightforward and predictable activity. Or so it seemed! But with the onset of the twenty-first century, we have witnessed inter alia the bursting of the ‘dot-com’ bubble, banking failure and credit crisis, oil and commodity price hikes, burgeoning demand for resources from China and other emerging economies, increased political uncertainty, growing consumer activism and social unrest, extremes of weather and natural disasters. Our view of life has changed radically over the last fifteen years!
Examples of the perils lurking in supply chains risk are legion: from apparel makers who have been exposed and punished by customers for using low-cost labour in south Asia; to the scandal of food and children’s toy manufacturers using defective or proscribed materials; to catastrophic failures of supplier performance and oversight leading to environmental disaster in the oil and gas sector and draconian fines and compensation.
If we were to burden ourselves with all the potential risks that could assail us, we might never sleep at night! The key to a tolerable existence is to ensure that we have identified what could hurt us, to the fullest extent possible. This will require us to recognise the context in which we are operating; assess the appetite we have for risk in the business; and identify the resources we have available to manage the potential risks to which the business is exposed.
And whereas we would always like to believe that we have thought of every eventuality, that we have an answer for everything, and that we possess the capacity successfully to tackle any issue head on, we need to be realistic and measured in our response.
There are five broad areas of supply chain risk that should concern us, and that should be put under the microscope by the supply chain function:
1. Failure or delay risk. This category covers the risk of complete, and possibly permanent, supply or service failure, or the risk to the inbound supply of goods or the provision of specific services. For example, the trends over the last couple of decades for outsourcing, off-shoring and globalisation has added complexity and uncertainty to what might previously have been straightforward arrangements for the provision of components and assemblies to manufacturing businesses. Factor in time zones, language, culture, complex logistics, project management and product life-cycle management, political and legislative uncertainty, you have a potent mix of issues which, if not carefully managed, can lead to a significant increase in difficulty in this area.
2. Brand and reputational risk. Here, we are concerned with the factors which could be disastrous for our brand or our business reputation generally, either due to failure or supply chain practices that are in conflict with our organisation’s principles and values, and the expectations of our customers and stakeholders. The response of many organisations to the dangers presented to brand has been to invoke ‘corporate social responsibility’ (CSR) programmes or ‘sustainable procurement’ programmes focused on gaining an in-depth understanding of economic, social/ethical and environmental risk.
3. Competitive advantage risk. This includes factors which might see our competitive advantage being undermined by, for example, the theft of intellectual property, counterfeiting of our products, or the ‘passing off’ of other company’s products as our own, or the diffusion of products through ‘grey market’ channels. Whereas imitation might be seen as a form of flattery, there is no doubt that differences in business culture across the globe can present us with problems in protecting our product portfolios: it is not always possible to rely on contractual instruments or legal protections in all the jurisdictions in which we operate.
4. Price and cost risk. Probably the most pressing risk facing most procurement and supply chain managers on behalf of their businesses, the risk that business costs end up being higher than anticipated or planned for, even where there are contractual arrangements in place for protection. Commodity price hikes can lead to the need for urgent upward revision of prices; lengthy supply chains can increase the costs of logistics, project management and obsolescence.
5. Quality risks. These include factors concerned with quality failure of inbound goods, poor product or service quality and field defects resulting in customer dissatisfaction. Whereas emphasis has shifted from end-of-line inspection to the control of processes and the reduction of variability, the pursuit of low-cost supply chains has in some instances been at the expense of repeatable quality.
So how should we tackle these risks? The starting point is to gain a detailed understanding of our supply chains – and this will require a collaborative approach with suppliers – to map relationships, and identify potential ‘hot spots’. Then we prepare a risk ‘register’, with two dimensions: the likelihood of something happening; and the severity of that possibility, next we prioritise the outputs. Finally, we prepare our action plan to tackle the most pressing items, and identify the measures we should take, as appropriate, to avoid, manage, mitigate or prepare contingencies for each of the risks we have identified.
We do need to exercise a degree of caution, however. An accurate perspective on risk is important. Can we clearly define patterns in what is described as ‘common cause failure’: if we do not understand the extent to which events might be part of a pattern, we may tackle them in the wrong manner. Conversely, ‘special cause failure’ requires us to ensure that we have the capability and expertise correctly to diagnose a problem. ‘Severe starting conditions’ requires us to understand correctly the scale of a potential risk that we might seek to understand – have we underestimated the impact or severity of a risk event?
But even when we have identified a source of risk, how effectively can we quantify the impact of those risks? Can we put a price on the loss of our reputation or the damage to our brand, for example? We need to be able to develop an approach that quantifies the ‘risk and reward’ perspective – what is the cost of risk, and what is the reward for effective management of it? – usually boiled down to a fraction of a known and measurable financial target, such as our estimated profit.
In preparing our approach, there are some key questions we should ask to achieve balance in the management of risk in our supply chains:
– What is our stance towards risk as an organisation – are we averse to, neutral towards or embracing of risk? (The risk ‘appetite’)
– What level of risk are we prepared to accept, balanced against the effort of managing that risk? (The risk ‘profile’)
– How much are we willing – and able – to invest to manage the portfolio of risk? (The risk ‘budget’)
– To what extent can we find creative solutions to work around the risk? (The risk ‘opportunity’)
– Does the organisation have – or have access to – the skills to manage the risk? (The risk ‘capability’)
The management of risk can never be an exact science: there are no cast-iron guarantees. But neither is it all doom and gloom! It is possible, with commitment, imagination, an effective approach and a robust process, successfully to identify and manage the vast majority of supply chain risks. And awareness is the first step on that journey.