Recent natural disasters are forcing supply chain executives to take a hard look at their supplier relationships. There has always been a risk of natural disasters but the frequency is increasing with more substantial consequences. The global nature of the supply chain creates more risk as the consumer is much more likely to buy elsewhere. Companies can’t rely on customer loyalty. In the article, Boeing and Sharp: Addressing Different Types of Supply Chain Risk, the two companies speak about their changes in strategy. How do you define critical parts that require a second source? The article talks about the effectiveness of focusing on the 80 percent of your spend that typically comes from 20 percent of your suppliers. Does that work? The article debates that it does not and I agree. How many of you have heard about a label shortage affecting a high dollar shipment? Supply chain risk analysis involves a number of criteria. Cost is one, but also the characteristics of the material. Is it custom? Are their capacity limitations with your supplier? Are there currency risks? What is the leadtime? Sharp also talks about regulatory or legislative risks specifically related to solar panel demand. What is the government’s policy on renewable energy? Is there risk that the policy may change? There is a cost to addressing risk. Typically the senior executives of a company need to approve such decisions. It is recommended that a number of different response management strategy scenarios are evaluated and compared before making any final decisions. This allows the decision to be more objective by understanding the margin or customer service impact of selecting one strategy over another. The article states that, “Companies that manage supply chain risks effectively will outperform those that ignore or are blindsided by them.” This is certainly true but the wild card is the natural disaster itself. Recently our family cottage was damaged by a wind storm. The damage was not significant but the question was, “Do we submit a claim?” The insurance company advised us that we would lose our 15 percent discount if there is a subsequent claim and the company may not want us as a customer. With the severity of natural disasters increasing, do we anticipate another with more serious damage and not submit a claim now or believe that it may never happen again? This is the dilemma we are evaluating now. Much like forecasts, weather is unpredictable. Risk analysis is paramount with full disclosure within the organization of the supply chain strategy and the assumptions associated with it. My colleague John Westerveld also wrote a blog recently on risk management called, "Natural disasters aren’t the only risks in town." What are your thoughts?
What's the cost of addressing supply chain risks?
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