Preparing for Inevitable Supply Chain Disruptions

Product recalls from Asian vendors. Store or warehouse closures due to natural disasters like hurricanes/floods/earthquakes. Labor unrest. Missed deliveries from customs-clearance delays and/or port bottlenecks.

The list goes on and on…dozens if not hundreds of possible threats to your supply chain that could significantly disrupt the flow of your merchandise so it is NOT at the right place at the right time–when your customer is ready to buy.

Concerned yet? You should be, and you’re not alone. A 2006 study, funded by Accenture and conducted by S. Radoff Associates, survyed151 U.S. supply chain executives. Among the respondents asked to assess their risks: 50% anticipated the risk of raw material supply disruptions

36% expected the risk of import operations and customs delays

36% anticipated service failures because of longer supply lines and lead times

35% expected risks associated with geopolitical instability

30% anticipated risk associated with terrorist infiltration of cargo.

The greatest fear of the managers surveyed is the inability to ship products to customers, followed by disruption in the supply of raw materials, disruption in manufacturing, increase in costs, reduced labor productivity, and loss of market share.

A supply chain risk assessment is the systematic analysis of the probability of, potential location of, and the consequences (monetary, reputational, customer goodwill, etc.) of a major disruption in your inbound or outbound supply chains. To address this issue, supply chain risk management is a relatively new practice in the U.S. to proactively assess the risks to companies.

The Risk Management Institute (RMI) at Northern Kentucky University is leading the charge in academic and business thought leadership in engraining supply chain risk management in corporate America. Their research shows that supply chain risk is a function of threat, vulnerability, and consequence.

Risk = [Threat x Vulnerability] x Consequence Threat is a measure of the likelihood that a specific type of disruption or loss event will occur. Vulnerability measures the likelihood that various types of safeguards against the disruption and/or loss event will fail. And consequence measures the magnitude of the negative effects if the disruptions and/or loss event occurs.

How to address the risk? RMI uses a process to assess a company’s risk from a supply chain perspective. Excluding typical risk management arenas like insurance (which is a reactive tool in managing risk), this continuous process uses a fact-based quantitative approach to prioritizing risk from a cross-functional perspective.

RMI and FedEx tested this process by conducting pilots of supply chain risk management assessments with a handful of Fortune 500-1000 companies. Below is a summary of findings:

  • A 350-store retailer of apparel/leather merchandise initially thought that its risk management strategy was solid, given the existence of a risk management department in its organization. But beyond the typical risk department practices of filing insurance claims and theft prevention, the RMI supply chain risk management methodologies uncovered several risks, and suggested several mitigating strategies, not considered before, such as defining contingency plans for its third-party warehouse in Hong Kong, which channels the majority of its Asian sourcing, and engaging the executive team to define the company’s risk tolerance.
  • A jewelry retailer capitalized on fact-based results to prioritize the risks involved in selling through different distribution channels.
  • All retailers agreed that a very important, yet less often considered risk, is the “reputational” loss to a company due to a supply chain disruption which precludes a superior customer experience.

Here are three recommendations RMI and FedEx identified as areas to consider when engaging a supply chain risk management strategy:

  1. Risk management should be viewed from a strategic and a cross-functional perspective. A CFO views risk different than the CLO. Gain an accurate view from all sides. Establish a risk management committee that reviews and follows-up on issues on a periodic basis. Communicate this to the rest of your organization
  2. Define your company’s risk tolerance. Discuss with your board and C-level team what risk is your company willing to retain. There is no right or wrong answer here. Just make sure your team is well aware of the trade-offs. As every good continuous process, this should be evaluated on a periodic basis, to consider changes in your business conditions
  3. Develop risk management procedures. Don’t be surprised when receiving a 2 a.m. call from your Asian vendor telling you about a plant closure. Be proactive. Documenting contingency plans for your top 20-25 supply chain risks (or ‘chokepoints’ as RMI calls them) will put you well ahead of the curve.

A few well-placed supply chain risk management activities can produce significant improvements in overall disruption management. At a minimum, companies need to develop a focused, long-term plan for building supply chain resilience (its ability to adapt and recover, thereby reducing its vulnerability to risk) and responsiveness.

Speak to your risk management department to find out about their proactive risk management strategies for your supply chain. Start with your insurance, risk management provider, or organizations like RMI. Ask whether they offer supply chain risk management tools and services to analyze the assessment of their risks, suggestions on risk-mitigation strategies, and contingency plans. Risk management needs to be increasingly viewed as a strategic approach throughout the entire enterprise.

Jose Li (jose.li@fedex.com) is marketing principal in FedEx’s corporate marketing department.

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