Supply Chain Risk Management Requires a Full-time Effort

Stephen DeAngelis

November 25, 2014

The APICS Supply Chain Council recently released the results of a survey that highlight the ubiquity of chronic supply chain disruption. According the Council, chronic supply chain disruption is “a newly defined and pervasive phenomenon.” [“Chronic Disruption Plagues over 73 Percent of Supply Chain Managers, APICS News, 4 November 2014] The Council defines chronic supply chain disruption as “a persistent disruption that degrades, but does not inhibit, supply chain function and that does not respond to traditional remedies.” The Council claims that it “is an issue that supply chain and operations management professionals need to understand and design supply chains to mitigate against.” In the article, Peter Bolstorff, APICS Supply Chain Council Executive Director, states, “Achieving excellence in supply chain and operations management requires the detection and elimination of everything that interferes with optimal efficiency, including chronic disruption. … It is important to recognize both chronic and situational disruption because it enables supply chain and operations management professionals to align supply chain strategy with risk management processes. Being aware of risks brought on by disruption and having appropriate response scenarios helps mitigate or avoid negative impact.”

 

Admittedly, almost every article I’ve read or written concerning supply chain risk management deals with situational disruption. Most analysts strongly urge companies with global supply chains to maintain a full-time supply chain risk management process because the more stretched out the value chain is the more likely it is to experience disruptions. Something is always happening somewhere in the world that could affect supply chain functionality. Adding chronic disruption to the picture only underscores the importance of having a full-time effort in place. According to the APICS SCC article, “The survey discovered chronic disruption is frequently caused by internal issues that are hard to recognize and even more difficult to measure. These causes often include a lack of manpower or trained manpower, a lack of updated information technology, short-term financial pressures and more. The survey also found that while many industries are impacted by chronic disruption, manufacturing was most impacted, 41 percent, followed by health care and pharmaceuticals, 10 percent, and the food and beverage industry, 10 percent.” By its very nature, something that is chronic is refers to something that is persistent or otherwise long-lasting in its effects. In other words, by definition, chronic disruption by itself requires full-time attention.

 

You probably haven’t thought much about chronic operational problems in terms of supply chain risk management; hopefully, that will change. Deloitte asserts that every organization needs to develop a risk intelligent culture (i.e., an organizational culture that looks for potential risks and moves quickly to address them). The company writes, “Even though many organizations have spent years developing and implementing risk management frameworks, policies, procedures and sophisticated technologies, some of them are still experiencing significant, unexpected problems far more often than they would like. On any given week, a glance at the business headlines offers ample reason for concern. So what’s missing? For many, the infrastructure is in place  but the culture is weak. And no matter how good the risk infrastructure, risk management is essentially a people issue, because people take responsibility for managing risk. Smart organizations have developed a culture of risk intelligence to gain the edge.” [“Five Questions on Cultivating a Risk Intelligent Culture,” Deloitte, 17 September 2013] The important thing to note about the Deloitte recommendation is that a risk intelligent culture can address both chronic and situational challenges.

 

Pramod Sethumadhavan, a manager at GEP, agrees that companies must be proactive in their risk management efforts. “I find it ironic that many organizations today look at supply chain risk from a unilateral perspective.” he writes. “The impact of natural disasters have repeatedly raised questions on organizations’ preparedness to tackle supply chain disruptions. Companies today look for geographical presence and spread of their key suppliers to ensure business continuity. But is that all a company should do to mitigate risk? With the complex supply chain networks that companies are leveraging, there is risk even without a major global event — there is risk in maintaining status quo and in inaction!” [“Don’t Wait For A Tsunami To Combat Supplier Risk,” Procurement Leaders, 18 August 2014] Scott Baret, Deloitte & Touche LLP’s global leader of Enterprise Risk Services for the Financial Services Industry practice, agrees that companies must be proactive. “Leaders,” he states, “should actively shape their risk culture into something purposeful that is aligned with business strategy — and where each employee understands how to make the right risk-based decisions.” Eddie Barrett, a director with Deloitte Consulting LLP, adds, “In a risk intelligent organization, everyone in the organization understands its approach to risk and they take personal responsibility for managing risk in their work every day. That’s part of the definition of risk intelligence. At the same time, there are a handful of people who typically have elevated responsibilities for risk culture.”

 

By making everyone in an organization risk savvy, many of the chronic causes of disruption noted by the APICS SCC survey will be addressed in the natural course of business. This will leave dedicated risk management professionals time to concentrate more fully on potentially disastrous situational disruptions. Even though 2014 has been a fairly calm year for natural disasters that have disrupted supply chains, survey results from the Business Continuity Institute indicate “nearly a quarter of respondents … claimed their organization had suffered losses of at least €1m ($1.25m) during the previous 12 months (up from 15 percent last year) as a result of supply chain disruptions.” [“Number of Businesses Reporting Million-dollar Supply Chain Disruptions Rises,” SupplyChainBrain, 6 November 2014] The report makes it clear that natural disasters aren’t the only cause of costly disruptions. The survey found that the primary cause for most disruptions was an “unplanned IT and telecommunications outage (52.9 percent).” The article continues:

“Organizations cannot simply bury their heads in the sand and pretend an incident will never happen to them. The survey showed that 76 percent of respondents had experienced at least one supply chain disruption during the previous 12 months, yet a quarter of respondents (28 percent) still had no business continuity (BC) arrangements in place to deal with such an event. Supported by global insurer Zurich, the report concludes that supply chain disruptions are costly and may cause significant damage to an organization’s reputation. While the survey results indicate a growing awareness of BC and its role in ensuring supply chain resilience, many organizations have yet to improve on their reporting and BC arrangements. While budgets for business continuity and ensuring supply chain resilience are often slashed in favor of other priorities, this study demonstrates why this often might not be a wise course of action.”

The survey indicated that consequences of supply chain disruption include: The loss of productivity (58.5 percent); increased cost of working (47.5 percent); and loss of revenue (44.7 percent). Every company needs to be prepared to mitigate the effects of a major supply chain disruption. Being unprepared could set up a company for complete failure. On the other hand, companies need to be aware of the chronic problems that can cause delays and disruptions. They may not be as catastrophic as situational disruptions, but they can be costly nonetheless. Supply chain risk management should be an all-day, everyday activity for every company with an extended supply chain.