CEB: Organisations must learn from the natural disasters in 2011 to better collaborate across functions and use software to support improved risk management of the supply network. In 2011 several major natural disasters caused tragic personal results but also seriously impacted businesses including the tsunami in Japan and floods in Thailand – with both affecting component manufacturers in the car and phone sectors.
Our research shows that 50% of procurement executives feel direct pressure from their CEO to improve their supply chain’s risk management—unsurprising given that 87% of companies experienced at least one surprise disruption in the last 24 months. Moreover each incident costs on average $2 million.
Increasing reliance on 3rd parties introduces a greater likelihood of compliance risk from corruption, from import-export license issues, and labour and employment violations which all cause massive reputational harm. Despite these elevated risks 78% of compliance professionals report little or no control over approval of 3rd party relationships and 55% report little or no control over the auditing and monitoring of these relationships.
Procurement is often expected to manage all aspects of the supply network including the associated risks, but several factors that make this unlikely:
Procurement’s non-involvement in buy decisions. Purchasing can be devolved in an organisation and decisions to buy will not always involve procurement specialists. For example, IT can subscribe to Cloud computing services, the legal department acquire external law firms services, marketing selects advertising agencies and facilities lease buildings all without Procurement’s support and due process
Lack of expertise and mandate to address all risk. Procurement typically focuses on supplier quality, reliability, value and innovation while others in the firm focus on other aspects of risk. Legal and compliance departments focus on meeting regulatory requirements – especially bribery and corruption risks. Insurance and risk managers typically target the costs resulting from natural or other disasters causing significant disruption to supplies. CSR and IR teams worry about reputational risks arising through supplier malpractice. Risk needs to be managed holistically.
Disruption can take many unexpected and varied forms – prevention or avoidance of all possible scenarios is not feasible. Earthquakes can destroy component manufacturers, economic turbulence can bankrupt a supplier and pirates can kidnap and delay goods in transit. As mentioned in other articles – “prevent what you can and prepare for the rest”.
What should executives do now?
Bring together the expertise from procurement, legal, compliance, insurance risk management and other specialists within the organisation to form a supply chain risk management forum;
Stratify suppliers into “strategic”, “important” and “other” to focus risk identification, assessment and mitigation efforts onto the strategic/important parts of your supply chain;
Balance risk mitigation options with the benefits of cost reducing techniques such as streamlined production, single sourcing, JIT logistics, minimal buffer stocks, etc. Use insurance and crisis response plans as part of the overall integrated risk mitigation and business continuity strategy;
Consider using collaborative supplier relationship management software. This allows the sharing of information from specialist teams, the identification of gaps in knowledge and the avoidance of overlapping reviews of supplier performance. Update supplier intelligence regularly to adjust risk mitigation as necessary. CEB