Wade McDaniel, VP Solutions Architecture
As an industry, we need to shift our focus from thinking about and talking about supply chain risk and do more about actively managing it.
A recent study from Dr. Kevin McCormack of DRK Research, the author of Supply Risk Management: Minimizing Disruptions in Global Sourcing, found that very few companies are developing an active investment strategy in risk management. In response to one of his survey questions, 95 percent of companies strongly agreed that they should monitor and measure supplier risk indicators to predict events. That same group of companies stated that only 30 percent did this job well. That is a huge gap in thinking one thing but not putting it into practice. This is not an isolated case — Aberdeen and Gartner research studies are leading to the same conclusion. So what is really going on here?
I was presenting at a logistics conference a few weeks ago on the topic of risk management. There was good advance signup for the sessions, but when it came time to attend the session, only 30 percent attended the 45-minute session. I know that this is anecdotal data, but I didn’t find it that surprising. If I am to believe the research results, it leads to a possible conclusion that, although there is a lot of interest in managing supply chain risk, there isn’t much action being taken, even via attending a short discussion on the topic. Those who did attend the session also expressed the same notions — lots of talk and little action.
So what is going on here? We all know that our supply chains are growing more complicated, for instance by operating in politically and environmentally hostile places. So why don’t we have good investment strategies to mitigate risks, or comprehensive plans on how we respond to something when it does happen? The recent SCM World Chief Supply Chain Officer report found that most companies thought the biggest risks are commodity price volatility, followed by safety and shortages. Natural disasters and political events were last on the list. The three most used mitigation strategies are dual sourcing, auditing suppliers, and holding safety stock.
Why does this make me nervous? The three most used mitigation strategies, while being tried and tested, are nothing new to the supply chain. And what makes me even more nervous is that many companies in survey responses state that they don’t do a good job at auditing their suppliers.
Take that one step further: Holding safety stock can affect a company’s financial performance, and corporate finance teams can, and frequently do, ask that these levels be adjusted in order to meet enterprise objectives. A dual sourcing strategy also can create myriad issues. For instance, how second sourced is a second source? In the tech business, it’s all about scale and efficiencies. This tends to lead to geographic manufacturing clusters, large producers of commodity items, and so on. It concentrates risk versus spreading risk. In short, we are using the same decades-old tools, but it’s a new playing field and requires new thinking.
So what’s to be done? I suggest the first step is to admit that we are in the middle of risky supply chains, and that we should take stock of our company’s capability to avoid and mitigate risk. We should then set a clear course on how to avoid risk when possible, how to recover when something does go wrong, and how to price risk into our supply chains in order to make it sustainable when supply issues inevitably do happen.