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Risk Management Concerns Continue to Draw Attention

March 4, 2013


“As the modern business world becomes more and more sophisticated,” writes Emily Holbrook, co-editor of Risk Management Monitor and editor of Risk Management magazine, “so too do the supply chains on which organizations rely. And as these supply chains have become more sophisticated and intertwined, the risk of possible problems has grown.” [“The Growing Problem of Supply Chain Risk,” Risk Management Monitor, 11 February 2013] She continues:

“A recent report by Deloitte states that ‘Because of the importance of supply chain management to companies’ success, supply chain risk events are having a profound effect and becoming more costly.’ The consulting firm surveyed 600 executives at manufacturing and retail companies to understand their perceptions of the causes and effects of supply chain risks. Some of the key findings include:

  • Supply chain risk is a strategic issue. There are now more risks to the supply chain and risk events are becoming more costly. As a result, 71% of executives said that supply chain risk is important in strategic decision making at their companies.
  • Margin erosion and sudden demand changes cause the greatest impacts. The most common and the most costly outcomes of supply chain disruptions are erosion of margins and an inability to keep up with sudden changes in demand, which illustrates the extent to which the supply chain risk issue affects the ‘heart of the business.’
  • Most concern about extended value chain. Executives surveyed are more concerned about risks to their extended value chain—outside suppliers, distributors, and customers—than about risks to company-owned operations and supporting functions.
  • Supply chain risk management is not always considered effective. Two thirds of companies have a supply chain risk management program in place, but only half the surveyed executives believed those programs are extremely or very effective.
  • Companies face a wide variety of challenges. Executives cited a wide variety of challenges including problems with collaboration, end-to-end visibility, and justifying investment in supply chain risk programs, among others. However, no single challenge stood out, indicating the need for broad approaches.
  • Many companies lack the latest tools. Current tools and limited adoption of advanced technologies are often constraining companies’ ability to understand and mitigate today’s evolving supply chain risks.”

It’s not too difficult to see why supply risk management remains a concern. Over two-thirds of executives indicate that supply chain risk management is a strategic concern, but only half of those executives believe they have effective risk management programs. Holbrook reports that only 13% of the surveyed executives “considered their companies to be extremely effective” in managing supply chain risk. She continues:

“When asked which strategies have been most effective, executives most often cited building stronger relationships, building business continuity plans and developing the ability to quickly adapt the production or distribution network. In all, however, Deloitte’s survey did not reveal the most positive news for companies and how they manage supply chain risk. But if anything, executives can use this information to better understand the weaknesses in today’s supply chain environment. As we’ve seen with past catastrophes and economic troubles, the chain is complex and ever-evolving. Keeping up with changes and eliminating the effect of events is what true supply chain resiliency is.”

Risks are, and have always been, part of doing business. As analysts at The Strategic Sourceror note, “Every supply chain faces threats from circumstances beyond the control of company executives.” [“Supply chain risks growing,” 11 February 2013] They go to note, “Many businesses have risk management strategies in place to mitigate these potential problems. However, not all potential issues can fully be eliminated, and firms across the globe are facing an increased number of supply chain risks as their companies grow and their supply chains continue to expand their reach.” The article continues:

“Risks are prevalent – and varied – in every supply chain. While some companies may be unable to procure raw materials due to political unrest in a region, others may be forced to halt production after a natural disaster limits their manufacturing capabilities. More companies may encounter limited shipping capabilities if a large storm hits, and other corporations may find themselves unable to keep up with demand after a particular product becomes unexpectedly popular. While these risks are all different, they all have significant impacts on supply chains and a company’s ability to perform well and consistently increase revenue.”

Citing the same Deloitte study discussed by Holbrook, they note “45 percent of executives surveyed believe their risk management plans are only somewhat or not at all effective. These problems can have a significant impact on companies trying to manage a complex or lengthy supply chain. The survey indicated 53 percent of executives think disruptions have become more expensive to rectify in the past three years, with those in the technology, industrial products and diversified manufacturing industries being more likely to have this opinion. Forty-eight percent of those surveyed thought the frequency of risky events had increased over the past three years.” Addressing the content of the report, Kelly Marchese, principal for Deloitte Consulting, stated, “Supply chains are increasingly complex, and their interlinked, global nature makes the vulnerable to a range of risks. This increased complexity, coupled with a greater frequency of disruptive events such as geopolitical events and natural disasters, presents a precarious situation for companies without solid risk management programs in place.” The article continues:

“A recent World Economic Forum report indicated 80 percent of global companies see the opportunity for increased supply chain security as a huge priority. Unfortunately, a company can never fully prepare for and eliminate all risks. Unexpected events do occur, and there’s no way to prevent natural disasters or political unrest. However, businesses can take the steps to mitigate risk and adequately prepare for any potential problems their supply chains may face.”

Morley Speed, Managing Director at Guy Carpenter, a full-service reinsurance intermediary firm, asserts:

“Both the scale and complexity of global manufacturing interdependencies, compounded by just-in-time processes, contribute to the vulnerability of supply routes to abrupt and devastating blockage. Management consultants, PRTM, in their report, ‘Global Supply Chains 2010-2012,’ reported that 85 percent of 350 respondents expected the complexity of their supply chains to grow. … At the same time market transparency and greater price sensitivity mean that supply chain volatility and uncertainty ‘have permanently increased.’ PRTM reports that risk management must apply itself across the entire supply chain. However, ‘many companies lack the capabilities critical for … managing an increasingly complex and global supply chain.'” [“Contingent Business Interruption: Life Support For Industry,” GC Capital Ideas, 10 September 2012]

The analysts The Strategic Sourceror write about a couple of strategies that companies have used to make themselves more resilient.

“Some companies have worked to implement strategic sourcing policies or backup procurement practices that will ensure they are prepared in the event a major supplier is unable to provide them with essential raw materials or products. This can ensure a business has access to necessary supplies even if a natural disaster has hit their primary raw material provider and allows manufacturing to continue as usual. Other companies are taking the initiative to mitigate risk by moving operations back to the U.S. While some businesses can enjoy major cost savings by manufacturing products overseas, having domestic production facilities can help a company eliminate some potential risks. The U.S. typically has strong and effective disaster relief processes to help those hit by natural disasters or tragedies, meaning a factory shut down by an event typically won’t be closed for too long. However, when production facilities are across the world, a company may have no idea how a country’s government is prepared to deal with disasters, potentially making it more risky for firms to operate overseas.”

The insurance industry reports that it has witnessed “significant increases in cold spot catastrophe losses. This growing trend refers to exposures in territories that have historically been considered non-peak zones and are unmodeled or inadequately modeled.” [“Global Losses Of 2011 Changed The Perception Of Risk,” by David Flandro, Julian Alovisi, and Lucy Dalimonte, GC Capital Insights, 25 October 2012] If insurers are having difficulty modeling risks to supply chains, you can be assured that companies are having an even more difficult time because they generally have access to less information than insurance companies. If loss of revenue from supply chain disruptions isn’t enough to worry about, “supply-chain disruptions cut about 7% of a firm’s shareholder value, according to research by Accenture cited in a recent World Economic Forum (WEF) report on supply-chain resiliency.” [“Supply Breaks Slash Share Values 7%,” by David M. Katz, CFO, 6 February 2013] Katz reports, “The takeaway from the research? ‘The longer it takes to resolve the disruption, the more negative is its impact. Firms need to develop the ability to quickly resolve the problem and prevent escalation and worsening of the situation,’ according to the WEF report.” The bottom line is that more attention needs to be focused on making companies resilient to a changing and risky world.

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