Our group conducted a research about the potential for managing risks in Supply Chain Management. Risk management was mostly handled by a corporate function, usually dealing with insurance companies and some security issues. However, risk management in the supply chain has emerged rather recently and it appears many managers and functional areas are not involved. Most strongly disagreed their workplace uses supply chain risk managers who work closely with corporate risk mgmt and very few fully understand the activities being performed by their risk management group. On a higher level, the corporate function is involved with risk management and has contact with insurance companies, but does not necessarily coordinate risk management activities in the whole group, not does it appear to develop directives.
Most firms have outsourced one or more of its non-core business functions. For financial reasons, resource constraints, and/or the need to tap into expertise they do not have, outsourcing has become a key aspect of many strategic initiatives. Most are not planning to outsource all or some of our risk management functions. In general, they have no intentions to outsource risk management and are strongly inclined to develop these skills internally by purchasing a risk management application for internal use, and specifically in the SCM area. However, most strongly feel there is no single set of tools or technologies on the market for managing supply chain risks while also strongly feeling that managing supply chain risk is an increasingly important initiative for their operations. Interest and need levels for supply chain risk applications remains very high.
Firms see a broad set of risk factors that pose a disruption to their supply chains. These risks did not vary much by industry, and most were shared. Supplier failure/reliability was the top risk factor and common across all respondents. Bankruptcies of suppliers, logistics failure, commodity cost volatility, natural disasters, and strikes/labor disputes were distant seconds. The non-manufacturing respondents were more inclined to place a higher priority on logistics failure which is not surprising since they were mostly made up of distributors and a retailer.
While the majority of the manufacturing respondents identified supplier failure as their top risk factor, they also attributed the majority of their downtime in operations to supplier failure. In general, these firms have reacted to manage this risk factor, along with others such as natural disasters, strikes, etc., by building risk considerations into current SCM applications. Commodity cost volatility was also a growing concern, but with limited amounts of systems to manage its risk. For example, the majority of the firms strongly disagreed that they were using hedging strategies (to protect against commodity price swings) and speculation (forward placement of inventory, forward buying of raw material, etc.) for managing supply chain risks (and yet it was identified as one the top risk factors). Not surprisingly, firms were very disappointed with their supply chain’s performance on lower commodity prices and reduced material price volatility. Only one firm in the entire sample had a system in place to proactively manage commodity prices. This firm had a dedicated staff that used a price sliding system on key commodities which were tied to market indices (e.g., plastics, metals, rubbers, etc.).
Notice that some of the top risk factors are to a large extent beyond the control of buying organizations (e.g., natural disasters, default or ruin of supplier, geopolitical events, or perhaps even supplier failure). Managers insisted that while preventing these will not be possible, reacting to them quickly is an option through contingency planning. The firms in this study are recognized as leaders in SCM and several have received formal recognition by industry associations for their ability to use SCM applications in a customer-driven manner. For example, these firms were very satisfied with their supply chain group’s performance on the following issues: after sales service performance, supplier reliability, inventory management, delivery reliability, order completeness, damage free delivery, and meeting customer service levels. However, they did not show a proactive commitment to risk management. They strongly disagreed that they were prepared to minimize the effects of disruptions (terrorism, weather, theft, etc.). They also did not think proactive risk mitigation efforts applied to the supply chain was common practice for them. Finally, even less thought they could actually exploit risk to an advantage by taking calculated risks in the supply chain.
Firms strongly agreed that managing supply chain risks is driven by reactions to failures rather than being proactively driven. Most agreed that they have had supply disruptions that have caused financial hardships in the past 24 months. There was no indication that managing risk was being driven by anything other than failure and remediation. However, the largest gaps in performance for reducing disruptions were in tighter financing conditions, exchange rate fluctuations, and commodity cost volatility. While supplier failure is a high risk factor for all the firms and will increase in risk for several of the firms, some firms did say that they expect supplier failure to be less of a risk in the future. A close assessment of these firms reveals that they have done the most to build risk considerations into as many SCM applications as possible.
There was no indication that risk management has become a main part of the firms’ SCM activities or that it even helped SCM meet the organization’s objectives. It is recommended that corporate risk management groups focus on positioning the entire organization to try to avoid supply chain disruptions, and to develop strategies to manage the impact of them should avoidance not be possible. More tools are needed to assist in risk management at the supply chain level and not just at the level of the individual firm. This study concluded that the use of managing risks in the supply chain was complacent. It appears that in developing supply chain strategies which focus on cost reduction, these firms have played down the risks from supply chain disruptions. Risk considerations are still reactive in nature but have the potential of adding value in a proactive, strategic, and long-term manner.
The recommendations of this study describes ideal conditions as being where there is a supply chain risk manager who is responsible for development and implementation of managing risks in the supply chain. This supply chain risk manager should also work closely together with corporate risk management, as well as with the supply chain managers. In this study, a gap was suggested as firms failed to use supply chain managers who work closely with corporate risk management and managers did not fully understand the activities being performed by their risk management groups.
Supply chain managers should also use the tools and processes developed my supply chain risk managers to analyze, assess, and manage risk in their supply chains. In the absence of risk management applications, the supply chain managers in this study are building risk considerations into existing traditional SCM applications (e.g., spend, contract, & inventory management, demand planning, benchmarking, etc). This study shows that mostly supply chain managers run and coordinate the work to maintain an optimal balance between risk exposures and costs for damages versus protection activities. Supply chain managers are the interface to other functional areas and they are also responsible for risk management in the supply chain. Core production should of course support SCM with risk management issues. This means that many different players could be involved in sharing responsibility for implementing and maintaining a system for risk management. This could make roles unclear, so responsibilities need to be defined. However, the key responsibility lies with supply chain managers that should run risk management work in their respective parts of the supply chain.
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Dr. Sime (Sheema) Curkovic, Ph.D., Professor, Operations/Supply Chain
Western Michigan University, Haworth College of Business