The Risk of Failure

We never used to think that much about risk in supply chains. Those were the days when most manufacturing was domestic or products were purchased from one or two international factories that we monitored closely. But oh, have things changed!

Now risk management is an important function within most supply chain organizations. Global supply chains have become longer, stretching worldwide; and with every stretched link comes the potential for a weak spot and additional risk of failure.

As a result, managing risk of failure in supply chains has become a hot topic. With events like 9-11, the Japanese tsunami, the Icelandic volcano and others, supply chain managers have taken a hard look at where they have global vulnerabilities and how to mitigate the risk of disaster.

Of course, risk is not limited to natural disasters. Risk comes in many forms such as customs compliance, supplier vulnerability in quality or delivery, risk of supplier financial failure, strikes, market downturns and upturns and just about anything else you can think of. For example, most large companies measure the financial effect of a stevedore strike and plan for alternative deliveries of products, from ocean freight to air freight, or the use of alternate ports. Supply chain executives will consider budgeting for the increase in cost of using alternative modes of transportation. Supply chain executives may also associate supplier ethics and sustainability issues with risk management as these may risk a company’s reputation and brand.

We help companies identify risks by developing a Risk Matrix, then determining how each risk can be addressed and mitigated either through planning, process design and contractual clauses. The key is to be pro-active and not wait around until disaster happens.

There are even new supply chain Risk Management software solutions on the market that help supply chain professionals identify supply chain vulnerabilities. Weak links in the chain and alternatives are documented and characterized. Armed with this information, supply chain professionals can develop alternatives for each point of weakness and plan for when disaster happens; and it will happen.

I was particularly impressed with software I saw recently called ICIX. Among other functionality, this software allows foreign suppliers and test labs to input information and test results directly into the system so that the overall performance of the supply chain can be compared against expectations. Walmart’s Chinese suppliers for example, can input expected shipment information while independent test labs can deliver product test results directly into the software system. If the products fail test, the shipment can be disallowed before it leaves China, thereby reducing risk of receiving bad product in the US and identifying where remedial action needs to be taken.

International supply chain risk has become a high priority agenda item for executives. With some careful thought and planning, it can be managed.

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