Managing Risk in the Global Supply Chain

Risk in the Global Supply Chain
Risk is a fact of life for the supply chain professional due to innumerable forces subject to change or beyond control within the supply chain such as legal, security, regulatory and environmental compliance; weather and natural disasters; and terrorism.

The scope and reach of the supply chain cries out for a formal, documented process to manage risk. But without a crisis to motivate action, risk planning often falls to the bottom of the priority list. The low priority for managing risk in companies is puzzling.

Having a risk management plan can be used as a competitive advantage, since so few firms have one. An effective risk management process for the supply chain can help companies avoid missed customer commitments, stock outs, reduced earnings, increased time-to-market cycles, and negative impacts to brand perception.

The Survey Says…
To discover what the best in the business are doing to mitigate risk, the Haslam College of Business' Global Supply Chain Institute surveyed over 150 supply chain executives across industry and completed in depth face-to-face meetings with six companies.

The data showed surprising statistics in the areas of

1. Facility Loss and Backup Plans
2. Supplier Loss and Backup Plans
3. Supply Chain Risks

Facility Loss and Backup Plans
If a natural disaster or major equipment failure shuts down a company facility (a factory or a DC), about half of the firms surveyed (53%) have a backup plan that can be implemented fairly quickly. The bad news is that the other half (47%) do not have a backup plan for factories or DCs.

About seven in ten companies (69%) have a documented response plan in place to attempt to salvage business with their customers if disaster strikes, either through product substitution, proactive communication, or with inventory. This means that almost a third of companies do not have any disaster response plan in place for supply chain risk.

Supplier Loss and Backup Plans
On average about 45% of the suppliers of the firms surveyed could continue to supply if they suffer a disaster in one location, meaning that over half (55%) could not continue supplying within a reasonable time frame.

The survey said that nearly half (45%) of supplier spending for U.S. based companies is outside the United States, with 21% in Asia. Of course longer supply lines increase supply chain risk.

Firms vary widely in terms of how many of their suppliers are sole sourced. In this survey, 38% of suppliers are sole sourced. But the spread is very broad. At just one standard deviation, the range for sole sourcing among the firms surveyed was 13% to 63%. It can be safely said that many firms take on the risk of sole sourcing with a relatively large number of their suppliers. Some do this for economic reasons (one supplier has a significantly lower cost and/or higher quality), for practical reasons (no other supplier can satisfy the company's needs adequately, or unfortunately for relationship reasons (“we've always done business this way.”)

Supply Chain Risks
As illustrated in the chart below, the number one risk on the minds of survey participants concerns potential quality problems. Long global supply lines make it very difficult to recover from quality issues. Next in the list of risk concerns is the increased inventory due to a longer global supply chain. Companies say they carry at least 60-75 days of supply in additional inventory when they elect to outsource to Asia. In the rush to Asia 20 years ago, inventory was not a major concern. But the huge amount of additional inventory caused by a long global supply chain shocked and dismayed many of those who didn't fully appreciate this impact in advance. Most firms now understand that inventory increases working capital, which depresses cash flow, which depresses shareholder value. Supply chain professionals find it extremely difficult to achieve the aggressive inventory goals given to them by the CEO/CFO when they have to contend with extremely long global supply lines.

The third ranked risk is that of natural disasters, perhaps brought to top of mind with high profile natural disasters such as the Japanese Tsunami and Thailand flooding of 2011.

Supply chain professionals are least concerned about terrorism and piracy and customs delays. Firms have gotten a lot savvier about dealing with customs issues. They are taking full advantage of every program that speeds customs processing like C-TPAT in the United States.

Supply Chain Risk Rating of concern on a scale of 1-10
(10 indicating most concern)
Quality 5.8
Inventory 5.4
Natural Disasters 5.2
Economics 5.1
Transit Loss 5.0
New Product Delay 4.9
Cyber Security 4.7
Intellectual Property 4.5
Political Instability 4.3
Customs 4.1
Terrorism 3.8

Conclusion
Supply chain professionals cannot afford to delay fortifying their supply chains against disaster and yet many of them do. Regardless of a company's size and geographical scope, there is no shortage of methodologies to help identify and prioritize risks. Firms must take advantage of the information and tools available now to ensure continuity and resilience for the long-term if they want to remain competitive.

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