Supply Risk Management typically becomes a hot-button issue in the procurement world when there is an economic shock or financial crisis. By the time that happens, it’s too late. Instead, you need to use periods of relative tranquility to get ready. If the last time your organization had a serious talk about supply risk was 2010, use these simple steps to “start the conversation”.
What is Supply Risk?
While using “anything bad” as a definition for supply risk may be concise, it doesn’t get you very far. Instead, understand that there are three primary types of risk, each with its own set of causes, impacts and mitigation approaches:
- Disruption Risk; “Where’s my stuff?” Disruption risk is the one we typically think of first. A crop fails, a manufacturing plant is shut down, shipping company goes out of business, etc. (Hanjin Shipping to Pay Handlers to Unload U.S.-Bound Ships). Your production line (and ability to serve customers) is shut down and you need to react quickly.
- Brand Risk; “We’re in the newspaper? Why?” This is a risk that primarily impacts your top-line and the one that can get the attention of the C-suite most quickly. Safety recalls generally fall into this category and are sure to make headlines (GM to Recall 4.3 Million Vehicles for Software-Related Airbag Defect). Quickly finding the appropriate suppliers is key to managing these events
- Price Risk: “We’re paying what?!” Least associated with supply risk but having an out-sized impact on procurement are price risk events where something happens to cause a material impact on the prices you’re paying for key inputs. The most famous of these comes from the oil and fuel markets. If you ever think oil prices have settled down, just wait a bit.
For each of these risks, your first challenge will be identifying who specifically in your supply chain is part of the issue. Doing so without automated information systems is nearly impossible and certainly time-consuming. However, you can’t fix a problem if you don’t know where it’s coming from.
By classifying your potential risks within this framework, you’ll be better prepared to understand, respond and, hopefully, prevent them.
Are you ready?
To determine how well-prepared your organization is to manage supply risk, ask yourself the following questions:
- Do you have an established supply risk management program in place today?
- What percentage of your supply base is involved? No one? Strategic? Everyone?
- What information do you track about your suppliers? What information do they maintain on your behalf?
- How do you identify and quantify the risks associated with any one supplier?
- Do you know what kinds of risk your suppliers face in their own supply chains? How are you managing for these?
- What percentage of your supply base is at risk of bankruptcy as of today?
- Is the risk in your supply chain concentrated in a particular commodity, region or industry? Which ones? How do you track and manage?
- Do you have a contingency plan if you lose a supplier and how will you measure a new supplier's ability to meet your needs?
- Do you have a public relations plan in case your company’s name ends up in the newspaper tomorrow? For what kind of crises? Which are most likely given your organization and industry?
- Who within your organization is responsible for identifying, evaluating, prioritizing and mitigating supplier risk? Who are they accountable to?
How will you prepare and react?
Lastly, have an approach for addressing the different risks you’re facing. We’ve found the following framework helpful for organizing your approaches.
- Find: Determine where the problems are
- Fix: Put mitigation efforts in place now
- Follow-through: Keep at it, especially when things are quiet
While this is certainly not meant to be a comprehensive guide to managing your supply risk, we hope it serves as a helpful guide for organizing your approach.
No matter what, think about risk now, before it’s upon you.
For more information on these approaches or to learn more about how Scanmarket can help you achieve your business objectives, please visit us at www.scanmarket.com.
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