Supply Chain Risk Management: Better Safe than Sorry

Stephen DeAngelis

May 7, 2015

“Doing business abroad definitely has its benefits,” asserts Mickey North Rizza (@MNorthRizza), Vice President of Strategic Services at BravoSolution, “but it’s also risky business as the global supply chain can bring on a slew of unique disruptions, political unrest being a top concern right now for international retailers.”[1] Business leaders in every commercial sector understand that their supply chains are susceptible to disruption and they know that disruptions can be costly in terms of both money and reputation. If your company’s tolerance for risk is low, you would do well spending some time perusing the 2015 FM Global Resilience Index, issued by business property insurer FM Global. FM Global notes:

“Supply chain disruption is one of the leading causes of business volatility. The FM Global Resilience Index is the first data-driven tool and repository that ranks the business resilience of 130 countries. It is designed to help executives evaluate and manage supply chain risk. Nine key drivers of supply chain risk are grouped into three categories: economic, risk quality and supply chain factors. These combine to form the composite index. Scores are bound on a scale of 0 to 100 with 0 representing the lowest resilience and 100 being the highest resilience.”

The interactive map found on 2015 FM Global Resilience Index website allows you to see the composite score for countries in which your business might have factories or suppliers. It is interesting to note that the United States is divided into three regions, with each region receiving its own resilience score. The East Coast Region (Region 1) is ranked 16th with a score of 85.6, the West Coast Region (Region 2) is ranked 21st with a score of 79.1, and the Mid-America region (Region 3) is ranked 10th with a score of 88.3. The following infographic from FM Global and Oxford Metrica provides a good overview of this year’s Resilience Index.

 

Rosalie Donlon (@RosalieDonlon), senior editor at PropertyCasualty360.com, writes, “Louis A. Gritzo, Ph.D., vice president, research, FM Global, explains that the term resilience captures all the factors that can go into the bad things happening that relate to business.”[2] Donlon elaborates:

“The factors include all the hazards that are presented as well as the ability for those hazards to be managed within those countries. The more resilient a country is the less likely that bad things will happen to an organization as a result of hazards, whether natural or manmade. When businesses understand how resilient a country is they do a better job of managing and mitigating risk, and they’re better prepared when bad things do happen. Companies often find surprises when they start looking at their supply chains. The concern for most companies is not with their first- or even second-tier suppliers, but deeper with the third and fourth tiers. ‘These are the things that challenge companies working in today’s brittle environment,’ says Gritzo. ‘When one link breaks, then the whole chain breaks.’ Companies need to communicate the importance of understanding the vulnerability of every level within the supply chain throughout the chain. The value of the index, Gritzo believes, is that ‘It opens the topic up for discussion in a very straightforward fashion.’ It also combines many complicated factors and issues into one index that everyone in the supply chain can refer to when planning for business disruptions.”

Being safe rather than sorry means making the effort to understand who your supplier’s suppliers are, where they are located, and what vulnerabilities to disruption they may have. “Business leaders who don’t evaluate countries and supply chain resilience can suffer long-term consequences,” said Bret Ahnell, executive vice president, operations, FM Global. “If your supply chain fails, it can be difficult or impossible to get your market share, revenue and reputation back. The FM Global Resilience Index is designed to help business leaders stay in business by making informed decisions about where to place and maintain global supplier facilities.”[3] If the Global Resilience Index doesn’t convince you that it’s a wild world out there, perhaps Rizza can. She writes:

“Although it’s impossible to completely eliminate risk from your supply chain, being aware of the possible risks can help to mitigate any issues that may arise. Here are four risks that retailers need to prepare for when doing business abroad; especially in emerging markets.

  • Rising Regulations: New regulations continue to pop up along the supply chain, and uncertainty around these new rules can stall decision making and planning. Depending on the region you’re operating in, you’ll face different regulations, which will inevitably pose challenges for compliance. Getting visibility into your supply chain and gaining tighter control over your materials is imperative so you can be agile in complying with new regulations.
  • Foreign Exchange: Currency exchange rates are always in a state of flux, causing investment values to continuously fluctuate. Commodity prices are also subject to inflation, which can result in pressure from low cost competitors. Thoroughly analysing spend to see where your money is going gives you an idea of how you can reallocate your resources and lower the costs for consumers.
  • Geo-Political risk: When conducting business in emerging markets, it’s very important to conduct an assessment of the current host government, its stability, and overall attitude toward trade and foreign direct investment. Having an alternate list of suppliers at the ready and leveraging E-sourcing to understand what products and price points are out there will help you confidently pull the trigger on a new order should your original list of suppliers be unwilling to trade.
  • Extreme weather events: Natural disasters always pose a real threat to the supply chain — shipment disruptions, delayed operations at fulfillment warehouses and increased consumer demand can all result from natural risk. It’s important to understand how likely natural disasters are to impact your suppliers and have a source of backup supply at the ready to bridge against supply shortages and hiccups.

Global business is risky business because the global supply chain can deliver efficiency, but can also increase risk in the process.”

Risk is not always a bad thing, especially when trying to innovate; but, supply chain risk is an area where you are generally better safe than sorry.

 

Footnotes
[1] Mickey North Rizza, “Four reasons a global supply chain can be risky business,” Supply Chain Digital, 16 March 2015.
[2] Rosalie Donlon, “How brittle is your supply chain? FM Global Resilience Index has the answer,” PropertyCasualty360.com, 31 March 2015.
[3] Hailey Lynne McKeefry, “Safe Supply Chain Destinations: The Geography of Resilience,” EBN, 3 April 2015.