Are We Looking Deeply Enough At Supply Chain Risk

Many organisations are starting to take supply chain risk management seriously.  This focus may have come from experience with actual supply chain disruptions, from a new recognition of risk coming from the increase in articles in the supply chain press, or arising from pressure from Boards and investors.  The release of the new international standard on Risk Management, ISO31000, a year or so ago has also added pressure to take risk seriously.

While the additional focus will undoubtedly result in a reduction in overall risk, organisations will continue to be “surprised” by events.  There are a number of reasons for this, issues include areas such as an unwillingness to invest in “mitigation” when “things are going so well”.  Often organisations see that risk comes from outside their organisation (a bias towards risk comes from poorly performing suppliers).  What they fail to realise is that disruption can just as easily come from failures in their internal processes.  In particular planning, forecasting and replenishment processes can deliver nasty surprises.  Any clear eyed view of supply chain risk will also recognise that the root cause of major supply chain disruptions is often from the demand side of the business.  Either firms experience demand that is less than expected, more than expected, or different than expected.

Even when firms take this unbiased view of risk they often take a one dimensional view of risk drivers.  The normal tools of risk management such as “risk registers” support this one dimensional representation of risk.  We recommend a broader two dimensional view be taken of risk drivers if firms are serious about truly addressing the causes of risk.

Take a situation where a firm has recognised and put in place treatment plans for a number of different risk factors. One of these risks is a key supplier who is in some financial difficulty.  The countermeasure is to pay for goods on a COD basis which greatly improves the supplier’s cash flow.  Another of the risks identified is the aging of the existing production machinery.  The countermeasure is to implement a gradual replacement program over the next few years.  In both cases the firm has decided to accept the residual risk that remains after their treatment action.  One of the key production machines breaks down and the line for one product is unavailable for two weeks.  This lack of business has a terminal impact on the supplier and they go into bankruptcy.  The customer is not able to easily replace the specialised product they supplied.  This then has a very negative impact on the operations of the customer who may take several years to recover (see upcoming blog on the impact of supply chain disruptions).

For a real example we only have to consider the situation where the cost down purchasing policies of the major car manufacturers resulted in their main supplier of fasteners going into receivership.  The cost of propping up that supplier while “non-standard” fasteners were resourced overseas would have most likely wiped out any gains made as a result of the original cost down contracts.  This is a clear case of these firms failing to understand the “unintended consequences” of their actions.

So as illustrated in the example above there is a definite need to take a wider two dimensional view of supply chain risk.  If you would like to discuss your specific supply chain risks and how to recognise the complex interactions between them, then get in contact with us at andrew.downard@adsupplychain.com.au or call 0419 581 705.

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