Identifying Risk Factors 2

Factors for Successfully Managing Supply Chain Risks Part 2

This blog post is the continuation of our Identifying the Factors for Successfully Managing Supply Chain Risks - Factor 1 – Corporate Strategy (Part 1 of 5) research post. Our recent study to better understand supply chain risks focused on the structure, implementation, and maintenance of a formal system for managing risks in the supply chain.  These factors included: 1) Corporate Strategy, 2) Supply Chain Organization, 3) Process Management, 4) Performance Metrics, and 5) Information & Technology. We will now further explore Factor 2 Supply Chain Organization.

Factor 2:

Supply Chain Organization

Risk management in this study was mostly handled by a corporate function, usually dealing with insurance companies and some security issues. However, risk management in the supply chain has emerged rather recently and it appears many managers and functional areas are not involved. The following questions were asked on 1 to 7 scale (strongly disagree to strongly agree):   1) My workplace uses supply chain risk managers who work closely with corporate risk mgmt (mean=2.53, var.=3.03); and 2) I fully understand the activities being performed by our risk management group (mean=4.00, var.=2.66). On a higher level, the corporate function is involved with risk management and has contact with insurance companies, but does not necessarily coordinate risk management activities in the whole group, not does it appear to develop directives.

Most of the firms in this study have outsourced one or more of its non-core business functions. For financial reasons, resource constraints, and/or the need to tap into expertise they do not have, outsourcing has become a key aspect of many strategic initiatives. The following question was asked on 1 to 7 scale (strongly disagree to strongly agree): 1) We are planning to outsource all or some of our risk management functions. The mean was only 2.25 with little variance. The organizations in this study have no intentions to outsource risk management and are strongly inclined to develop these skills internally by purchasing a risk management application for internal use, and specifically in the SCM area. However, the following questions were asked on 1 to 7 scale (strongly disagree to strongly agree): 1) There is no single set of tools or technologies on the market for managing supply chain risks; and 2) Managing supply chain risk is an increasingly important initiative for our operations. The means were well above 5.00 and had small amounts of variance. Again, interest and need levels for supply chain risk applications remains high.

Respondents in our study see a broad set of risk factors that pose a disruption to their supply chains. These risks did not vary much by industry, and most were shared. Supplier failure/reliability was the top risk factor and common across all respondents. Bankruptcies of suppliers, logistics failure, commodity cost volatility, natural disasters, and strikes/labor disputes were distant seconds. The non-manufacturing respondents were more inclined to place a higher priority on logistics failure which is not surprising since they were mostly made up of distributors and a retailer.

While the majority of the manufacturing respondents identified supplier failure as their top risk factor, they also attributed the majority of their downtime in operations to supplier failure. In general, these firms have reacted to manage this risk factor, along with others such as natural disasters, strikes, etc., by building risk considerations into current SCM applications. Commodity cost volatility was also a growing concern, but with limited amounts of systems to manage its risk. For example, the majority of the firms strongly disagreed that they were using hedging strategies (to protect against commodity price swings) and speculation (forward placement of inventory, forward buying of raw material, etc.) for managing supply chain risks (and yet it was identified as one the top risk factors). Not surprisingly, firms were very disappointed with their supply chain’s performance on lower commodity prices and reduced material price volatility. Only one firm in the entire sample had a system in place to proactively manage commodity prices. This firm had a dedicated staff that used a price sliding system on key commodities which were tied to market indices (e.g., plastics, metals, rubbers, etc.).

Notice that some of the top risk factors are to a large extent beyond the control of buying organizations (e.g., natural disasters, default or ruin of supplier, geopolitical events, or perhaps even supplier failure). Managers insisted that while preventing these will not be possible, reacting to them quickly is an option through contingency planning. The firms in this study are recognized as leaders in SCM and several have received formal recognition by industry associations for their ability to use SCM applications in a customer-driven manner. For example, these firms were very satisfied with their supply chain group’s performance on the following issues: after sales service performance, supplier reliability, inventory management, delivery reliability, order completeness, damage free delivery, and meeting customer service levels. However, they did not show a proactive commitment to risk management. However, these questions were asked on 1 to 7 scale (strongly disagree to strongly agree): 1) We are prepared to minimize the effects of disruptions (terrorism, weather, theft, etc.); 2) Proactive risk mitigation efforts applied to the supply chain is common practice for us; and 3) We can actually exploit risk to an advantage by taking calculated risks in the supply chain. The means were very low and had small amounts of variance.

Most of the firms strongly agreed that managing supply chain risks is driven by reactions to failures rather than being proactively driven. Most managers agreed that they have had supply disruptions that have caused financial hardships in the past 24 months. There was no indication that managing risk was being driven by anything other than failure and remediation. However, the largest gaps in performance for reducing disruptions were in tighter financing conditions, exchange rate fluctuations, and commodity cost volatility. While supplier failure is a high risk factor for all the firms and will increase in risk for several of the firms, 13 firms did say that they expect supplier failure to be less of a risk in the future. A close assessment of these 13 firms reveals that they have done the most to build risk considerations into as many SCM applications as possible.

We hope Part 2 of the research study helps shed light into Factor 2 Supply Chain Organization Factor for Successfully Managing Supply Chain Risks. We will be covering our Factor 3 Supply Process Management study results next month.