Managing supply chain risk proactively Baltimore MD

Finding, quantifying, and minimizing supplychain risk could be the most important issue that global businesses contend with in this decade. There are two reasons for this. The first is risk impact: As part of a 2006 research study on risk management, Accenture found that 73 percent of companies have experienced supply chain disruptions in the past five years. Of those, executives at nearly one-third of responding companies said it took more than one month to recover, and 36 percent said it took between one week and one month to recover. The vast majority (94 percent) said the disruption affected profitability and their company's ability to meet customer expectations. Fifty-six percent said the impact on customer expectations was moderate or significant.

The second reason that contending with risk is such an important issue for global businesses is ubiquity: The more global operations become, the more supply chain risk grows. In the 2006 global operations study we profiled last month, Accenture researchers found that few companies develop their global operations strategies with specific attention to managing supply chain risk. Three-quarters of respondents acknowledged that they have not fully integrated risk mitigation with their global operations strategies, and nearly 10 percent have done nothing. And more than half stated that their global operations strategies have in fact increased supply chain risk. Only 13 percent said that risk dropped as a result of their global operations strategy.

The net effect appears to be that when it comes to global operations, a great many companies are overly vulnerable, overly confident, and largely unclear about what they are (or should be) doing to truly mitigate risk.

And it's not just companies responding to a survey. According to research conducted by Vinod R. Singhal, a professor of management at the Georgia Institute of Technology, hundreds of companies have experienced significant supply chain disruptions in recent years. In every case, those companies reported disappointing operating results and stock prices as a direct result of their disruptions. Some of the financial penalties cited by Dr. Singhal include double-digit drops in operating income, return on sales and return on assets, and double-digit increases in inventories and operating costs.

Cause and Effect

What are the most predominant and daunting causes of supply chain risk? And what steps should companies be taking to prepare themselves? Accenture research indicates that the most frequent causes of disruption are those associated with supply chain partners, raw materials, and natural disasters-one factor from each of the three categories shown in the graphic (controllable events, somewhat controllable events, and uncontrollable events). Looking more closely, however, it is clear that the more controllable events are generally the sources of the greatest disruption.

In a sense, this is good news: It means the problem is potentially soluble. To a large degree, innovative companies can eliminate or minimize risk-not just respond to it.

Respondents to our 2006 global operations survey also provided insight on their current risk mitigation activities. We asked them: "Which of the following processes do you have in place to identify and mitigate supply chain risk?" Respondents said they are prepared to:

• Manufacture locally as well as globally (62 percent).
• Source contingent suppliers and/or logistics providers (61 percent).
• Increase inventories and safety stock (53 percent).
• Establish a more geographically distributed supply base (50 percent).
• Build a formal supply chain risk management program (49 percent).
• Implement more/better forward- buying and hedging strategies (42 percent).
• Increase the level of insourcing, i.e., returning to home-country manufacturing (38 percent).

Despite the daunting impact and ubiquity of supply chains risks, there are several reasons for optimism. One is the relative degree of preparedness we noted (although we should add that many of the solutions on the list, particularly manufacturing locally and increasing inventories, are virtually certain to increase costs). Another ray of light is that the risks with the largest impact also tend to be the ones that are most controllable. To some extent, companies can control their destinies when it comes to risk.

And finally, given that risk is a 21st century reality, its successful management can be a huge leverage point for aggressive, innovative companies. In effect, their pursuit of high performance is certain to be advanced by risk-attuned global operating models, continuous improvement goals, and technology investments.

Any leading business knows that the one risk it will not take is overlooking the value and benefits of proactively managing the supply chain.