In today’s unpredictable economic environment, a clear understanding of an organization’s supply chain operations and its inherent risk is imperative. Many organizations, while acknowledging the crucial role that their supply chain plays with respect to their overall success, do little or nothing to quantify the risks associated with supply chain inadequacies. In “Understand Supply Chain Risk: A McKinsey Global Survey,” two-thirds of respondents say the risks to their supply chains have increased over the past five years. Of the responding companies, 25% have no formal risk assessment, while 39% of executives only feel “slightly capable of mitigating risk.” 1
Why is this important? What is the impact if your organization has a disruption in supply? According to Paul Michelman in his 2005 article in the Harvard Business Review, “A Framework for Risk Management,” 80% of large organizations will face a crisis of 10 days or more every four to five years. Of those affected, 73% will close or suffer a significant long-term impact to business, 43% will never recover sufficiently to resume business, and of those who do reopen, only 29% will be operating two years later. The result of a 10-day disruption is less than a 10% chance of survival. 2 Consequently, the combination of supply chain complexity, globalization, increases in regulation, and our current economic downturn, only exacerbate the challenges corporations face today.
What can be done to mitigate such uncertainty and risk? Best-in-Class organizations are assessing their supply chain and are developing the skills, processes, and tools necessary to compete in today’s unpredictable global economy. They are asking themselves tough questions and scrutinizing their supply chain from multiple dimensions. These include:
o How do we quantifiable define risk, and are we aligned and consistent in our definition?
o Are our suppliers meeting our expectations on delivery, cost, quality, scale and safety?
o Is our spend concentration by category, geography or supplier creating unnecessary risks? Do we look at more than spend with regards to risk (i.e., quality, reliability, business continuity, etc.)?
o How do we reduce risk from lower-tier suppliers?
o Do we need to enhance the skills and capabilities of our supply chain and procurement staff to meet the complex demands of our current environment?
o Do other departments understand their role in supporting a best-in-class supply chain?
o Have we documented and qualified all of our suppliers against requirements for various regulatory agencies and do they meet audit requirements?
Until an organization can answer these questions in the affirmative, the risk of failure remains strong. Through a proactive, unbiased evaluation of all links in the supply chain, the risks can be fully identified and mitigated. This in turn, will allow for organizations to weather the current economic storm and remain a viable business entity.
Regardless of the industry you serve, or the size organization you are a part of, there are several steps you can take to enhance efforts which may currently be underway in your organization.
o Audit the financial, operational, and balance of trade exposure of your most strategic and mission-critical suppliers. Too often the investigation of supplier solvency is limited to the initial sourcing effort. You need only to open a newspaper or turn on the nightly news to realize that the health of even the seemingly most stable companies can degrade quickly. Have any of your suppliers closed their doors due to the current economic crisis?
o Continually monitor for early warning signs from suppliers. Frequent requests for early payment or changes in sales and support personnel, a drop in quality or shipment delays can be indications that the supplier has cut too deep into its operations…
– Increase the frequency of supplier performance reviews. Aberdeen Group research finds that, of those companies doing regular performance reviews with suppliers, more than two-thirds conduct these on an infrequent basis – quarterly, semi-annually, or annually. In the face of highly volatile markets where credit is tight, you may want to consider stepping up these reviews to at least quarterly with your most strategic and mission-critical suppliers and semi-annually with your next tier of suppliers. Also, when it comes to measuring performance of suppliers, don’t limit yourself to the top percentage by spend. The more suppliers you measure, the less likely you are to be caught off guard.
– Automate your supplier management process. The above steps may be time consuming, but well worth the effort, considering the risk avoidance potential of these actions. Leading spend management organizations are simplifying this process by leveraging supplier management tools that combine self-service portals for suppliers to publish and manage their own profile information (and work flow for routing supplier profiles for review and approval); score-carding and performance measurement utilities; and project management capabilities for corrective action management. Use of such tools can improve visibility, control risk, and enable you to extend supplier management to a broader portion of your supply base.
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