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Tackling supply chain risk

January 3, 2013

In the publication Logistics Viewpoints, Adrian Gonzalez has written an excellent article on supply chain risk. He highlights some examples of the many and varied risks that confront today’s global business operations and calls for management to “make thinking about supply chain risk part of the corporate DNA”.

I certainly agree with Adrian that the quality of risk assessment and management needs to improve. He has identified a series of ideas and ‘best practice’ initiatives, but I think these overlook or ignore a few key points.

  1. Adrian correctly suggests that there should be greater financial analysis of risk and he cites the finance and insurance industry as a point of reference. I fully agree that one of the problems for business today is that functional silos have resulted in far too little overall commercial analysis. Finance is left to accountants, rather than being seen as fundamental to the operations of every business group. It is also the case that financial analysis is far too focused on individual deals or relationships and fails to look at risk portfolios. But to cite the financial services and insurance industry as one where ‘ managing risk is a core focus and discipline’ seems to me to rather ignore recent reality. Have we forgotten the financial collapse that underlies so many of today’s supply chain risks? Should we overlook the rogue traders, the weaknesses in compliance standards, the impact of ill-considered incentive schemes? And what about the constant need for regulation, including around supply risk, or the frequent headlines about regulatory breach? I think we need a rather different model on which to base the future!
  2. Building on the point I make about portfolio analysis, one reason that organizations are making such slow progress is because risk management is frequently positioned as n issue of resource and expertise (therefore an expense) rather than as an issue of business intelligence (and therefore an asset). Armies of risk managers scare the life out of top executives because they tend to strangle the business. Sadly, risk gurus often lack the incentive to make themselves redundant. What we really need is far better insight to the actual causes of risk, the things with a high probability that can be eliminated. Many examples of these have been highlighted in IACCM research; the real issues with supply chain management are weaknesses in defining requirements and scope, of managing change, of ensuring open and honest communications and clear allocation of responsibilities. They are also about areas such as performance management (or the lack of it) and developing contracts that share risk, rather than seek to allocate it to other parties and thereby ensure it is obscured.
  3. Improved supply chain performance carries a premium – and buyers are consciously choosing not to pay that premium. If they really cared about supply chain risk, the solutions are available today. They can select more reliable suppliers, they can dual source or identify alternatives, they can develop internal supply management resources to oversee outputs and outcomes, they can increase insurance. But each of these options carries a cost and there is no evidence that organizations are willing to bear those costs. Indeed, fundamental to improvement is the idea of greater collaboration, yet the actual behaviors of most Procurement organizations continue to undermine trust and place little value on cooperation.

In the end, the argument for improved supply chain risk faces a massive hurdle. Why would suppliers invest in the enhanced capabilities that Adrian identifies if the message they get from their customers is that price is the only thing that matters and loyalty is for idiots? Companies today are essentially saying they don’t want to cover the costs of largely unpredictable events – they will take the lower prices, shop around for alternatives and self-insure against the consequences.

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