Most companies likely have some kind of supply chain risk management strategy in place. However, researchers from Massachusetts Institute of Technology Forum for Supply Chain Innovation and PwC recently explored how sophisticated those strategies actually are. Unfortunately, more than half of the organizations studied were judged to have used immature risk management processes.
A foundation for improvement
Although there is no singular formula that will guarantee success, there are a few principles that can help supply chain executives navigate the complex ecosystems of modern business. Analysts identified five such pillars:
- Supply chain disruptions significantly impact organization-wide performance
- Organizations with comprehensive supply chain risk management frameworks are able to recover more quickly than those with limited strategies
- Supply chain leaders invest in solutions that allow for greater flexibility
- Risk segmentation solutions significantly improve resiliency even when a mature supply chain management strategy has already been established
- Mature supply chain risk management translates to improved operational and financial performance
These factors are particularly important to consider as organizations attempt to target global markets. Due to highly diverse operational and economic environments, it can be difficult to maintain visibility over all the issues that might affect the supply chain.
"When a company expands from a local or regional presence to a more global one, the operations strategy needs to be adjusted to align with the changes," the report stated. "The economic crisis in Europe is a good example of this. Due to the decrease in demand for many products and services in the continent, companies are changing strategies, seeking alternate global markets. That's when operations become more complex. Transportation and logistics become more challenging, lead times lengthen, costs increase and end customer service can suffer."
The report also identified multiple stages of maturity. The first is functional supply chain management, with ad-hoc risk reduction strategies. Organizations at this level may experience inefficiency due to duplicate or disconnected processes. Additionally, the lack of an appropriate governance structure makes it difficult to identify all potential supply chain risk factors.
Organizations at the second stage of maturity show a high level of internal process integration and have clearly defined risk management practices. However, they may have difficulty in documenting and improving new practices due to limited visibility in this area.
The third stage takes integration a step further. Organizations at this level are able to collaborate across partner networks, sharing information and improving processes together. The third level of maturity is marked by sophisticated B2B integration capabilities as well as standardized processes - this allows companies to be more proactive and reduce the chance that a disruption will occur. Furthermore, they are able to more quickly respond when a threat to the supply chain is revealed.
Stage four, the highest level of maturity, adds the element of supply chain flexibility. This addresses the need to respond to dynamic environments and adapt to situations in real time.
"Full flexibility in the supply chain product, network and process architecture and short supply chain transformation lead-times allow quick response and adaptability," the report stated. "Supplier segmentation is performed. Risk strategies are segmented based on supplier profiles and market-product combination characteristics."
Analysts were able to showcase several advantages that those with mature supply chain risk management frameworks had over organizations at lower stages of maturity. For example, organizations that rated flexibility as a top priority were more cost-efficient than those that did not. Despite the apparent benefits, only 9 percent of businesses studied had reached stage four, while 42 percent were at level two. This research indicates that more organizations should strive toward clear visibility over their supply chain management practices as well as flexibility so that issues can be addressed in a timely manner.
The role of technology in improving the supply chain
Transitioning toward a mature model will necessitate collaboration among all key stakeholders in the business. Dedicated efforts should also be made to align IT processes with the critical practices that keep the supply chain moving. As Spend Matters contributor Jason Busch recently observed, the technological tools an organization selects can make a drastic difference in its ability to govern its supply chain and reduce risk. For example, he highlighted the value of supply chain management software that can serve as a "centralized hub" for transactions, supplier profiles, customer profiles and invoices. He also predicted that the next evolution in these solutions would be to build risk management tools directly within a comprehensive platform.
This would allow organizations to develop segmented risk profiles as they onboard new partners. With segmentation being a core component of MIT's fourth level of maturity, investing in this type of software could accelerate improvement in the supply chain. Additionally, Busch noted that these solutions would address issues that can keep businesses stuck in the first two stages. By integrating risk management into supply chain solutions, there is less of a chance for redundant processes to cause inefficiency.
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