No business decision maker wants to authorize or generate unnecessary spending at his or her company. However, companies that do not make risk a core component of supply chain management decisions and investments will face extra costs.
Threats ranging from natural disasters to IT system failure can create large-scale disruption. While most business leaders conceptually know that relying on suppliers in a tsunami-prone area creates an added element of risk, they are not equipping front-line employees with the appropriate tools to avoid such threats. According to research from APQC, close to 50 percent of respondents said they had limited visibility into risk, Harvard Business Review Reported.
Many of those polled were relying on suppliers to fill out checklists to assess risk factors. As a result, it is not particularly surprising that 75 percent of organizations were hit by a major supply disruption in the past two years. HBR reporter Mary Driscoll commented that many business leaders are aware of the fact that they rely on suppliers in regions prone to natural disasters and suggested that the desire for low-cost production may have caused some to forgo a comprehensive cost-versus-risk analysis.
"Many ERM assessments focus on risks related to competitive strategy or the customer experience," Driscoll wrote. "The result is that too many boards don't think to ask about - and are not briefed on - the risks of, say, sourcing key components in risky regions of the world. They wind up blind, therefore, to many crucial strategic risks."
The lesson here is that supply chain management requires a more comprehensive understanding of factors that may affect suppliers, and short-term savings can translate into long-term expenses. The same type of considerations should be made for the IT infrastructure that supports the supply chain. For example, data loss can be particularly problematic when companies rely on updated and accurate information.
Make visibility a priority
Most supply chain management executives understand the need for greater visibility. However, this concept does not always translate to business process improvement or any action at all. IBM's Chief Supply Chain Officer Study provided some insight into why this is the case, highlighting organizational silos as a top barrier. Furthermore, it is easy forget that complete supply chain visibility is not just about what happens within a single organization.
"When we talk about supply chain visibility, it does not simply mean visibility into your own supply chain and your own shipments," said Bob Stoffel, senior vice president for united Parcel Service of America. "It means visibility among partners, which enables collaborative decision making closer to the customer. This is both a science (managing the technology) and an art (using the information and metrics for competitive advantage)."
Stoffel's comments align with perspectives of supply chain management leaders, which focus heavily on collaboration. For example, 72 percent of leaders have implemented vendor-managed inventory solutions, compared to only 53 percent of other supply chain executives.
Similar differences were found in risk management approaches. For instance, the most effective strategies not only implemented solutions to monitor compliance, but actively involved IT to monitor and respond to disruptive incidents. Researchers outlined several components of a smarter risk management framework, which include:
- Use predictive analytics to better plan supply chains according to weather events
- Create networked sustainability policies for the entire product lifecycle
- Leverage probability based risk assessments
The report highlighted Cisco as an example of innovation in this area. The company adopted an open source approach to documenting best practices for all of its partners. This led to the formation of a library of processes that could be leveraged to better assess risk. As a result, Cisco reacted to an earthquake in China before the disaster affected revenue.
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