- THE MAGAZINE
The realities of supply chain disruptions have become top of mind for executives in every industry. Sub-standard and unsafe working conditions, product shortages due to extreme weather-related events and the discovery of counterfeit or contaminated components are examples where companies have encountered risks that ultimately affect their ability to serve their customers. The food industry is no different.
Why are our supply chains more at risk?
The driving objective for every supply chain operation is to meet all customers’ orders with the right product delivered on time and at the lowest possible total cost to serve. The problem is that this objective operates under the key assumption that your suppliers, manufacturing locations, transportation providers, third-party service providers and other supply chain functions will operate and produce as expected.
In today’s world, supply chains operate with greater risk than ever before.
Initiatives to build “lean” supply chains have added efficiencies and reduced operating costs and complexity, but have also introduced additional operating risks by eliminating a “cushion” of redundant resources that may be advantageous during a major disruption.
Global supply chains have increased risk because the operating footprint has been “stretched” from the sourcing side of the operation to the need to serve emerging new markets. This extension of the operation adds complexity and diminishes span of control.
Today’s volatile business environment adds tremendous stress on an operation. Rapidly changing political landscapes, financial turmoil and ever-changing energy costs must be dealt with on an ongoing basis.
Justifying time and money to mitigate supply chain risks
While companies are continually looking for ways to cut costs, how do you justify spending valuable resources on proactive risk management activities? In some cases, regulations require businesses to employ risk management strategies such as the recent Food Safety Modernization Act (FSMA). However, in general, being more proactive requires gaining executive-level support, and that means the case needs to be made that supply chain risk management activities are tied directly to the protection of operating profits. In other words, by not being proactive in developing cost-effective supply chain risk mitigation strategies, the company could face negative consequences on long-term financial performance, shareholder value, customer goodwill, market reputation and overall market share.
Supply chain risk management programs are all about minimizing the financial negative impact of not being able to service customer orders.
So, how do you tackle this daunting task?
Effective supply chain risk management programs are built on three cornerstones—identify high-priority/high-impact risks, develop cost-effective risk mitigation strategies for those risks and then measure the performance of each strategy.
Identifying the supply chain risks
To be effective, the identification of high-priority risks must be done by a cross-functional team within the company. Without cross-functional consensus, the ongoing support that is required will diminish. Key to this consensus is effective communication concerning the risks that are being evaluated.
To assist in gaining a common understanding for enhanced communication on risk, the Council of Supply Chain Management Professionals (CSCMP), Lombard, Ill., in conjunction with Competitive Insights, LLC, Atlanta, developed the Supply Chain Risk Identification Structure (SCRIS) to help define the categories of risk management that can be applied by a company to help with this process. The following are the major categories of the sources of significant supply chain risks:
• Risks associated with the commerce of the supply chain (i.e. disruptions of single-sourced transportation carriers or suppliers).
• Geo-political/regulatory risks are man-made events that stop the flow of goods and services (i.e. new import/export regulations, union strikes or even terrorists' actions to contaminate food sources).
• Physical risks involve a significant disruption with material assets such as plants, distribution centers and ports (i.e. tornadoes destroying a manufacturing plant, river water levels affecting barge capabilities, etc.).
By having a structure for identifying risks, companies can better communicate and prioritize the risks that would significantly impact operational continuity and financial performance. With proper identification and prioritization of risks, companies can then develop strategies for mitigating the impact of supply chain disruptions.
Develop mitigation strategies
Risk mitigation strategies are dependent on the severity of the risk and the cost justifications associated with the mitigation actions. Risk mitigation strategies fall into one of three categories:
• Redundancy introduces multiple or redundant assets to mitigate specific supply chain risks.
• Contingency centers on well-planned alternative ways to operate targeted areas of the supply chain along with the proper training and documentation done in advance for rapid implementation when needed.
• Policy involves changes to operating guidelines and procedures that help mitigate identified supply chain risks. Policy strategies can extend into new requirements for suppliers as well as third-party service providers.
Measure operating performance against targeted supply chain risks
For each prioritized supply chain risk mitigation strategy, companies must define operational measurements that focus on the specific identified area of risk and its associated tolerance levels. In order to accomplish this, companies will need to integrate reliable data sources to get true visibility of their supply chain operation, and to establish measurements associated with the performance of mitigation strategies. This also allows businesses to monitor and refine risk mitigation strategies as the business environment changes. Finally, measuring performance also provides the ability for alerting activities for top prioritized risks.
For instance, a mitigation strategy could be a change in policy to limit dependency on single-source suppliers that contribute significantly to a company’s profitability. After measuring the current contribution of each supplier, an acceptable performance level could be defined as not to exceed 6% of the company’s total profit. Once alternative suppliers are found, alerting could be established if the threshold for any supplier exceeds 6%.
The impact of significant supply chain disruptions can often be mitigated by developing cost-effective strategies that have been developed using cross-functional participation. In today’s world, taking a proactive position can mean the difference between ongoing success and financial failure.