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Managing supply chain risk—are organizations doing enough?

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Focus on your supply chain

With global supply chain shortages following the earthquake in Japan, continuing unrest in the Middle East and Libya, hurricanes and tornadoes in the U.S. and the fluctuating costs of labor worldwide, it only makes sense that supply chain risk mitigation would be a hot topic. And it is—for business analysts, writers and risk-management firms. However, based on the findings from several recent surveys, I have to wonder if current events have made any real impact on supply chain management strategies within organizations.

Survey says: supply chain risk mitigation is not top-of-mind or top-of-budget for organizations

A recent Chainlink survey revealed that 45% of companies devote less than $50,000 each year to “assessing and auditing supplier and supply chain risk.” And as we begin to analyze data from our Manufacturing Outsourcing Strategies & Trends Survey, we are seeing some interesting initial results that indicate major gaps when it comes to managing supply chain risk.

For example: as the crisis in Japan showed, an entire supply chain can be destroyed in minutes, so it pays to have multiple sources for your components (especially critical ones). Yet more than two-thirds of our survey respondents revealed they rely on a single source for a critical process or component, which admittedly puts their supply chain at risk. And what’s more interesting to me is that in spite of the current global supply chain instability, only one-third of respondents plan to look for additional or alternate sources for parts in the next year.

Of course sourcing is just one component of a comprehensive supply chain risk mitigation strategy, but of those we polled, about 40% are not thinking any differently about their supply chain than they were prior to the earthquake in Japan. And for me, that was surprising to hear.

The realities of supply chain risk mitigation—why it can be a struggle to manage

From an analyst’s perspective, world events suggest that it is a perfect time to shore up your supply chain, but there are many reasons why implementing change in this area is easier said than done.

For one thing, many manufacturers are hoping that the worst is over. And who can blame them? The idea of another global crisis occurring on the heels of the most recent disaster is scary.

But if you are viewing these sorts of disasters as rare and improbable occurrences and adopting the mindset that “it won’t happen to me,” you may be setting yourself up for trouble. Nigel Issa, a European supply chain practice leader at Opera Solutions LLC, said in a recent Financier Worldwide article, “Many global supply chains have developed over the last 20 years based on the assumption of a stable world order with unlimited access to resources dominated by western firms.”

In that climate it made sense to believe that major disruptions were rare, ‘black-swan’ occurrences that can’t be predicted or planned for, but those days are behind us. In today’s interconnected world, geographical disasters and political unrest can impact businesses anytime, anywhere.

Another reason manufacturers neglect supply chain risk management is the constant pressure to cut costs. Organizations are increasingly being pushed to lean-up the supply chain by cutting spare inventory or “extra” talent, moving non-core services to lower cost providers and reducing suppliers. While consolidating inventory and job roles, leveraging single-source suppliers and accessing suppliers and customers in geopolitically, socially and environmentally riskier environments will certainly cut costs, these actions also increase sourcing risk.

Unfortunately, when faced with improving short term ROI versus investing in supply chain security, manufacturers who are being asked to do-more-with-less may very well decide to cut costs and hope for the best.

Even if manufacturers want to invest in shoring up their supply chains, many organizations have delegated supply chain risk management so far down the chain that the authority tasked with the job lacks any budget to invest in it. For about 80% of companies, according to the Chainlink survey, supply chain resilience is only a priority at the executive level if the executive is directly responsible for supply chain functions. Although C-level executives get involved after a crisis—when, as one survey respondent put it, it’s “all hands on deck”—in normal circumstances supply chain risk management is handled by lower-level managers. This means even the most well-intentioned manufacturing department may lack the authority or budget to make supply chain risk mitigation a priority.

Are organizations taking a calculated risk?

With so many organizations choosing not to invest in a Plan B, the last point to consider is that organizations aren’t overlooking supply chain risk management, they are making a calculated decision to not invest in it. Perhaps organizations feel cleanup is a more manageable cost than prevention, or that in times of large disasters someone will step up to fill the market need (think about the UPS strike where FedEx filled in the gaps).

Depending on the industry, there may also be considerable pressure to mitigate risk when it comes to governance, compliance and market demand—and in some cases that may be required. It could be possible that once the requirements are met, the costs of developing additional supply chain risk management processes are too great, and a choice is made to take the chance, relying on quick iteration ability and damage mitigation skills to meet demand in another way.

The future of production in an unstable world

Natural disasters, events in the Middle East and the recent rapid growth of China and India have made global supply routes less secure, and organizations need to examine the possible impact on their supply chains.

Issa warns that stability is a thing of the past—at least for now—and that organizations should be aware. “Globalization, pervasive connectivity, an increase in natural weather catastrophes, a shortage of natural resources and the expansion of the have/have-not chasm have created enormous volatility in the geopolitical and social landscape.” So although there is a lot of pressure to focus on creating value, shoring up your supply chain is increasingly important. And depending on your industry, a low-risk operational structure can even be a competitive advantage, so use it to your benefit if you can.

What do you think about investing in supply chain risk management? Do you see it as a necessary expenditure, a wasted cost or something you’d like to do if you had the resources?

I will be paying close attention to this topic over the next few months, so if you have any thoughts, please feel free to post a comment below.

About the Author

Alex Gammelgard

Alex managed social media marketing and communications at Arena from 2011 to 2012. Although coming in fresh to the manufacturing industry, Alex is married to an engineer and is well ...

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