Your supply chain is costing you money - Reason #5 Not having a supply chain risk management process

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Over the years, working for and with numerous manufacturing companies, I’ve seen many supply chain practices that cost companies money.  Over the next several weeks, I’ll outline these issues and discuss some ideas around how to avoid these practices. You can find the previous posts here:

Reason #5: Not having a supply chain risk management process

In today’s society, unless you are rich enough that you can afford to replace your possessions, pay for your health care, and cover your liabilities, you have insurance (unless you are poor enough that you can’t afford the premiums).  Insurance is a form of risk mitigation. Insurance protects us against theft, fire, accidents, and health emergencies and if this were to happen, it can provide for our family when we pass.   Yet, a surprising number of companies (while they have traditional insurance) do not have a supply chain risk management “insurance” aka a supply chain risk management process. To put it another way, they have insurance to protect them if someone trips on their property and sues, but don’t have a risk management process to mitigate against their top supplier going out of business.  The insurance covers what could be a million dollar risk, supply chain risk management protects against what could be a MULTI-BILLION dollar risk. Supply chain risk can be broken out into multiple different types;

  • Geographic:  This includes natural disasters and political unrest. These are the types of issues that impact supply for an entire region.  We saw this type of issue over the past several years with the Japan earthquake / Tsunami in and with the Thailand floods.  Political issues can also have a significant impact on supply. Conflicts, government policy changes, regulatory changes and coups can mean that supply is suddenly turned off or that a market is no longer available.
  • Supplier issues: This includes quality issues, delivery reliability, financial stability, reputation, strikes, and pricing changes.  We talked about many of these issues in the first post of this series – “Offshoring without getting the full picture”. The key point here is that in today’s connected supply chain, your suppliers are an extension of your own business.  If your supplier fails financially, it will impact your business.  If your supplier goes on strike or can’t deliver for some other reason, it will impact your business. If your supplier has had a shaky human rights record, your business’s reputation can get tarnished.  If your supplier decides that you need to pay more or global currency exchange rates drive up the cost of a component (and you have no alternatives ready to go) your margins can be significantly impacted.
  • Customer Demand: Interestingly, this is often ignored when people think about supply chain risk however, it can be one of the biggest factors.  If your demand decreases, you have excess inventory or idle capacity.  If your demand disappears completely you are out of business.  If your demand increases significantly, your supply chain can be overwhelmed and delivery becomes an issue.

IT  security: This is also often ignored when thinking about Supply Chain risk.  If you’ve been watching the news lately, you know that hackers seemingly are able to access corporate records at will.  Imagine now, if hackers accessed your design systems…. Your customer records, your accounts payables / accounts receivables.  Imagine if your proprietary designs and customer records were sold to your competitors.  Not a pleasant idea to think about but something that is happening every day despite the billions of dollars spent on IT security. In the post “Innovate approaches to Supply Chain Risk”  I describe 4 key action areas that companies developing a more systematic, focused and proactive supply chain risk management approach need to address as outlined in a report by SCM World;

  • Identifying and assessing risk – This includes visibility across the supply chain including a good understanding of the companies involved.  Leaders like Cisco and IBM utilize dialog with suppliers and customers as well as visual risk mapping and scenario planning techniques
  • Quantifying and prioritizing risk – Given that all companies operate on limited resources, focus on those areas that will deliver the biggest benefits. One way is to plot likelihood of occurrence against business impact. While this approach can work well for recurring operational risks like supplier performance, it doesn’t work as well for hard to predict incidents like natural disasters.  One approach suggested in the article is that supply chain managers assign financial impact and time to recover factors at a site and component level.  This tends to identify critical but low-spend suppliers that may otherwise be overlooked.
  • Mitigating Risk – inventory tracking and dual sourcing are considered to be the most effective risk mitigation strategies.  Also increasing use of standard components, segmented and regionalized supply chain strategies and business continuity plans
  • Speeding Recovery – Business continuity plans that have been developed and tested with suppliers are key to rapid recovery

Supply chain risk management is like insurance.  You hope you never need it, but if you do, you will consider it the best investment you ever made. Do you have a supply chain risk management process in place? What risks worry you and how do you mitigate against them? Comment back and let us know!  


Zimaseka Msindwana
- October 13, 2014 at 8:00am
I am a university first year student studying Supply Chain Management and I have to say this blog has been insightful for me. I have chosen this degree knowing only the basics of what it intails but this blog has helped me gain some in depth knowledge. Now I know what kind of situations I may encounter in the industry and how one can go about preventing them. Thank you for sharing all this information. It really is helping me realise I've made tge right choice for my future.
John Westerveld
- October 14, 2014 at 8:52am
Thank you for your kind comments. Having spent my career in manufacturing and supply chain, I can confirm that it can be an exciting and rewarding vocation. I'm excited about the renewed interests in supply chain education having seen a decline over the years - at least in North America. Wishing you all the best!
David Hardman
- October 27, 2014 at 11:22am
When you are thinking about risk you need to look way up the supply chain. What are the risks your suppliers are dealing with and if they are stuck in a bad situation how does that affect you? It's not in your immediate field of sight but it needs to be on your radar.
John Westerveld
- November 04, 2014 at 4:57am
Thank you David...

I totally agree. Supplier risk can be multiple levels down. Just think back to the Thailand floods of 2011. I recall that hard drives became relatively scarce and expensive. Not just because the hard drive manufacturers were directly impacted (some were - some were not), but because the suppliers to the hard drive manufacturers were hit as well. It is very important when you assess your supply chain risk that you look beyond your suppliers and also examine your suppliers supplier. You may find some surprises!
Stephen T
- November 11, 2014 at 12:26pm
I believe all too often that procurement professionals as well as the management that oversees them are captivated by cost savings above all else in their sourcing decisions. Considerations must be made besides who can deliver the lowest absolute cost; supplier evaluation must take into account qualitative risks as you have described above. Through a weighted supplier evaluation rubric or a TCO model that accounts for the company's risk appetite, companies can make better decisions than just those based on cost. Due diligence into suppliers can also help; knowing whether a supplier has other business, or how highly they are leveraged can be key determinants that can override other cost considerations.

As for how to manage risk with chosen suppliers, negotiation of contractual terms is crucial. In addition, an understanding of how all current events can affect suppliers is important for supply chain professionals. Ebola is now affecting oil drilling in Africa; the smart supply chain professionals have already thought of a possibility such as this and have made contingencies!
John Westerveld
- November 13, 2014 at 3:47pm
Thanks Stephen - Very good point. The lowest cost is small consolation when you have bad quality, missed deliveries and angry customers. The key as you point out is to perform a multi-dimensional evaluation of a supplier that includes factors like lead time, quality, delivery performance, location and shipping lanes.

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