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Companies have never been as dependent on their suppliers than they are in today’s networked economy.  Supply chains have never been leaner, longer or more global.  This exposes companies to new risks and increases the complexity of mitigating those risks.  In a poll conducted during a recent Supply and Demand Chain Executive webinar, “Risk Management: Are You Ready for Anything” 63% of respondents indicated that supply was impacted by vendor unreliability and 31% by natural disasters. 

A handful of examples to hit headlines include:

  • 2013 – Tesco’s horse meat burger scandal
  • 2012 – Explosion at Evonik Industries factory in Germany disrupts global supplies of CDT, a key ingredient in manufacturing automotive components
  • 2011 – Toyota’s production halts after the Tsunami stopped production at many suppliers in Japan

Risk will always exist, regardless of one’s supply chain structure.  Globalization of supply chains may present unique risks, but so do alternate approaches. Toyota was impacted precisely because its suppliers were concentrated in its home country rather than being distributed globally.  Emerging markets involve their own risks, but relying on suppliers in stable countries like Japan and Germany did not end well in the above examples.

So what should companies be doing?  Fundamentally, they need to have a clear supply risk strategy, with the tools and processes to support it. 

The following steps are what I recommend for any effective risk management program.

  1. Develop a holistic risk mitigation strategy.
    • Look at your overall supply chain.  Do you have alternate sources of supply for all critical items?  Are those alternates subject to the same risks as your primary?
    • Stress tests – they’re not just for banks.  Run scenarios on your supply chain to assess the impact of a broad range of possible risks.  No scenario will be risk-free and there are always “unknown unknowns,” but you will find some easy fixes and at least have a better sense of your vulnerabilities.
    • Be proactive.  You can’t address many issues, but that’s not an excuse to address none.  Is financing a risk for small suppliers?  Consider joint financing, early payments or at least leveraging technology to provide accurate visibility into cash flow for you and your suppliers.
  2. Qualify suppliers.  Most companies do this to one extent or another, looking at financials, certifications, even on-site visits.  That helps, but be sure to also:
    • Do so in the context of your overall strategy.  Consider your existing supplier risk profiles when qualifying an alternate.
    • Apply that diligence to second and lower tier suppliers.   This has become standard practice in some industries, but many are behind, and often this takes place after a supplier is selected, rather than before.  Technologyto help you obtain, review and track this information is available and is a critical enabler.
    • Leverage new insights.  Today’s networked economy has certainly added complexity, but it also generates data that can provide highly valuable insights.  Cloud-based solutions and networks can capture, generate and make such insights available at the right point in your process.  For example, business networks can help you discover new suppliers and share detailed peer reviews and other risk data together with supplier-provided information.
  3. Plan to react.  At some point, problems are sure to hit you by surprise.  Yet, its terrifying how many companies do not have plans in place on how to react.  Under 30% of respondents to another poll taken during the Supply & Demand Chain Executive webinar had clear reaction plans for supply chain disruptions.  Your stress tests should feed into building such plans.  The Red Cross is a great example.  By the nature of its work, its supply chains are disrupted in unpredictable ways when they are most needed, during disasters.  Yet they have implemented the systems and processes to adapt to those changes, as illustrated during their effective response to Hurricane Sandy.
  4. Monitor, monitor, monitor.  You have to regularly monitor and adjust the above.  Systems that can pull in all relevant information and alert you to changes help greatly.  As do the increasing forms of predictive risk data.

In today’s networked economy, companies face what can seem like a dizzying array of risks.  But you also have new insights and tools to better assess and mitigate risk.  Those companies that adapt by implementing the right processes enabled by the right systems and information will find themselves at a significant advantage.

To learn more about the potential of the networked economy, click here

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