Our group conducted research about the potential for managing risks in Supply Chain Management. Firms overwhelmingly agree there is no obvious single application for managing supply chain risks on the market. Most firms are only using existing SCM applications for managing risk. In the absence of risk management applications, these firms are building risk considerations into traditional SCM applications (e.g., spend, contract, & inventory management, demand planning, benchmarking, building long-term partnerships, etc). Some have said they would like to implement a SCM risk application in 1-2 years, and even more said they are only considering it. This indicates that while specific supply chain risk applications do not exist, interest levels are very high (around 80%). The 80/20 rule resurfaces as 80% of the firms have placed a priority on managing supply chain risks. Managing supply chain risk is an increasingly important initiative for operations and without a systematic analysis technique to assess risk, much can go wrong in a supply chain. Interest and need levels for supply chain risk applications remains high.
18% of the firms said they will spend over $1M in services, technology, and personnel to support managing supply chain risks, while 7% actually plan on spending over $5M. Another 52% said they plan on spending more modest amounts of less than $500,000. 30% simply indicated a moderately large amount of spend was planned. Not surprisingly, larger companies will invest more than smaller ones. The manufacturing firms look very similar in their higher spending efforts with a focus on supplier failure, whereas the non-manufacturing firms indicate lower spending levels with a focus on logistics failures.
Spending intentions for managing supply chain risks are very high and firms do plan on investing nontrivial amounts in managing supply chain risks. There was dedicated funding for managing supply chain risks and most indicated that such budgets will increase moving forward. However, less tan half will come from specific SCM departmental budgets and most indicated that SCM takes ownership of such investments. While spending intentions for managing supply chain risks are moderate, funding is poorly targeted and ownership is not centered within the SCM discipline. Managing risks is just now reaching the core of traditional and mature SCM applications.
A common theme identified from the cases was that while there were few examples of best practice, there were valuable lessons to be learned from the way individual companies managed risks. It was agreed that the management of risk should be a core issue in the planning of any organization. Firms have increased their exposure to risk through their SCM initiatives which focus on cost reduction. Few firms made a formal assessment of supply chain risks or had a strategy in place. These findings indicate the importance of dedicated resources and aligning risk management with corporate strategy.
Formulating an appropriately aligned organizational strategy can to a certain extent mitigate risks in the supply chain. While the actions of competitors, customers, and suppliers external to the company cannot be strictly controlled, formulation of an appropriate strategy can help a company prepare for many events. The companies in our study have a strategy committed to investing heavily in the development of their supply chains to increase cost efficiency in alignment with corporate strategy. However, they also need to limit their exposure to risk by investing in the implementation of systems to increase monitoring and control of their suppliers, while also aligning their strategies with corporate risk management groups. With significant opportunities for improvement, there was no indication that such systems and alignment were in place.
Most professional bodies which deal with risk take the view that risk management should be a continuous process which runs throughout the organization’s strategy. It should address methodically all risks surrounding the organization’s activities past, present, and in particular, future. It must be integrated into the culture of the organization with an effective policy and process led by senior management. It must also translate the strategy into tactical and operational objectives, assigning ownership throughout the organization with each manager and employee responsible for the management of risk as part of their job description. It must support accountability, performance metrics and rewards, thus promoting operational efficiency at all levels, including SCM.
Most of the risk management strategies appears to be fragmented – one group buys insurance, another administers claims, another handles everything related to safety or security, etc. The perspective of a holistic and enterprise wide approach is a new approach concerned with managing risks to provide reasonable assurance to all stakeholders (including SCM) regarding the achievement of company objectives. In reality, SCM covers the supply chain from suppliers to your company and not from your company to customers. Only the corporate risk management group can address risks for the entire supply chain and life cycle of a program. An effective strategy for managing risks in the supply chain requires a closely aligned strategy and relationship between risk managers and others in the organization. Risk management can provide its traditional expertise and information. Other functions such as purchasing, sales, marketing, finance, operations, and logistics can bring additional expertise. As a cross-functional collaborative team, these holistic and enterprise wide functions can create and implement a supply chain risk strategy that is strategically aligned with corporate objectives. This will require obtaining senior management understanding and approval, and setting up organizational responsibilities.
Gaining management support is often the most challenging part of implementing a proactive system for managing risks in the supply chain. It is necessary to emphasize the importance of supply chain risk management to senior management in order to get the properly targeted resources necessary to implement such a system (rather than the poorly targeted budgets often seen). Depending on the management culture, this should be the first step but could be the last. The firms in this study strongly disagreed supply chain risk initiatives are driven from the bottom up. This indicates the strong potential for a proactive approach since supply chain risk initiatives appear to be driven from the top down.
We recommend having an organizational strategy fully committed to undertaking risk assessments in the supply chain and at the very least the need for business continuity planning when the company is exposed to the supply chain. As a part of organizational strategy, it would behoove these firms to build a valued and respected risk management function. Progressive organizations will implement a risk management strategy to enable them to react to potential issues in a streamlined fashion. By having a plan, organizations are able to minimize a large ripple effect in other operations within their organization and across their supply chain.
For full report, see:
See, also (click “PDF” once on site):
Thank you. Sime
Dr. Sime (Sheema) Curkovic, Ph.D., Professor, Operations/Supply Chain
Western Michigan University, Haworth College of Business
“WMU Integrated Supply Management (ISM)…Nation’s best undergraduate SCM program (Gartner); 2nd in SCM technology (SoftwareAdvice); 2nd in top global SCM talent (SCM World)”