Supply chain risk management is a competitive advantage – it provides the opportunity

for procurement and supply chain functions to play a pivotal role in the company and to

position themselves as a strategic partner in the success of the entire company.

The Worthy Challenge of Supply Chain Risk Management

By acknowledging that our suppliers and customers have a significant influence on our ability to achieve success, we recognize our role in a chain of companies that make each other’s businesses possible. Every com-pany is reliant upon a series of buy-side to sell-side connections working as intended. Our suppliers have to make efficient purchases from their suppliers so they can offer us competitive pricing just as our customers need to have sufficient demand to support their purchases from us.

This chain of connections has always been a critical part of commerce, starting thousands of years ago on China’s silk road and continuing right up to the complex, extended supply chains of the 21st century.

If, in fact, supply chains are an inherent part of doing business, why is there such an increased focus today on managing the chain itself rather than the operation within the walls of our own organization? There are three primary reasons:

• Today business is conducted faster than ever, organi-zations are outsourcing all mission critical highly dif-ferentiated processes and networks are getting longer and more complex. As a result, markets reward the companies that are able to function in as close to ‘real time’ as possible.

• We have access to information today that, if we use it wisely, can inform decisions that our predecessors could only dream of.

The modern combination of speed, complexity, and infor-mation in commerce enables, no, mandates us, to have a clear understanding of the risks associated with the decisions we make, the companies we buy from, and the geographies our supplies and products move through.

So what is Risk in the Supply Chain? We talk about risk frequently, generally accepting it as a bad thing to be minimized or avoided whenever possible. However, without a concrete definition of risk we are powerless to manage it or even to make informed decisions about what time and resources we should invest in the effort. We are also prevented from identifying specific actions and assigning responsibility for them within the enter-prise.

Risk is usually associated with situations or conditions that expose companies to harm. You’ll notice, it is not the harm that we are dealing with directly, it is the po-tential for harm to befall us. The fact that the actual harm is still in the future puts the power in our hands to avoid it or at least mitigate its impact.

Harm can take multiple forms, usually involving time, cost, or brand damage. In the worst case, it may even have a direct, negative impact on the top line. Depen-ding on your business and your unique risk profile, harm can be late shipments that lead to delayed orders to your customers. Harm can take the form of price incre-ases that make your cost model unsustainable or un-available products that prevent your operation from working at all. Scariest of all may be the harm that tran-scends business transactions and affects the corporate brand instead. Rather than immediate top line impact, brand damage causes lingering problems that are hard to isolate and even harder to measure.

Every business, regardless of its size, is part of a larger commercial ecosystem. That ecosystem includes suppliers, customers, and, of course, the competition. Ambitious executive teams naturally want to foster the conditions in their unique ecosystem that they

believe will lead to the greatest possible opportunity for value creation and top line growth.

The Worthy Challenge of Supply Chain Risk Management

Before we can take active steps to influence – or manage – the risk that inevitably exists in the supply chain that we are inextricably a part of, we need to bet-ter understand the sources of risk in our commercial ecosystem.

Megatrends and Influencers In any given supply chain, there are direct and indirect forces that influence the corporate ecosystem. Indirect forces, or megatrends, are overarching and pervasive, affecting all companies, industries, and geographies, albeit to differing degrees. Influencers, which affect operations more directly, are more targeted in their impact, and might affect one industry, organization, or process and leave others untouched.

Megatrends Megatrends such as globalization, digitization, and climate change are so expansive that it can be hard to discern exactly what impact they will have on any given business. Their effects are likely to be felt gradually and over an extended period of time rather than through a sudden change in conditions or circumstances. Add to this the positive or neutral op-portunities associated with big data, the Internet of Things (IoT), and fluid demographics, and it would seem that stability and predictability are confined to the past.

All short term risks and opportunities associated with megatrends are defined by how other parties perceive them and what long term effect they are expected to have. For instance, in the short term, projections about climate change are more likely to result in new regula-tions than actual weather or temperature changes. And while these regulations do not necessarily represent direct risk, they become an additional constraint that needs to be factored into your business and legally adhered to. Similarly, many companies have started collecting massive amounts of data in the hopes of leveraging advanced analytics but without a clear plan for how they will monetize it.

The high-level impact of megatrends is something of a double-edged sword. While they do not have an imme-diate, material impact on most businesses, it is possible to miss the signs of change associated with them over time. Their gradual onset, and the discretion decision-makers can employ in deciding when to respond to them, will present some companies with an advantage and leave others scrambling to catch up.

Megatrends should be monitored closely, both for the changes they lead to and for the adjustments suppliers, customers, and competitors make in response to them. They should be incorporated in every strategy and planning session. Making these sessions fruitful requires that sufficient information about each megatrend be available at the time of discussion and monitored over time. Fortunately, most megatrends are so pervasive that we encounter them regularly in our general news reading and watching. Remembering to connect what we learn broadly to the specific circumstances of a company or market marks the difference between active and passive management of supply chain risk trends.

Source: Statista

Globalization led to high dependency on external value creation

20 %

80 %

value creation by automotive suppliers

value creation by OEM car manufacturer

Digitalization

Sustainability

Globalization

Climate Change

Global Megatrends

Demographic Change

Influencers Unlike megatrends, influencers are very specific and their impact is often a direct result of decisions made by a company’s leadership. Influencers include forces such as natural hazards, geopolitical crises, financial instability, changing regulations and standards, and unpredictable buying behavior. As with megatrends, there are positive and negative sides to the fact that they have a direct impact on businesses and supply chains.

On the one hand, each company or leader bears a great deal of responsibility for the risk influencers that they expose their company to. Deciding to buy from a supplier that is based in one country/region or another can lead to either increased or decreased risk. The same holds true when selecting between two compa-nies in a single market – even when they share the same geographical location – that have different sizes or financial structures.

The upside of all that responsibility is a greater ability to avoid influencer-based risk in the first place. As long as each company assesses their appetite for risk and the available budget to mitigate it, decisions can be made up front that accept a specific level of known risk or de-liberately accept additional cost in exchange for lower risk.

The other implication of risk influencers is the impact they have on companies in the extended supply chain: both upstream and down. As careful as you may be

about factoring your risk appetite into all critical decis-ions, the awareness and decisions of others can have just as much of an impact on your business. Under-standing the risk influencers at play two, three (or more) tiers deep in the supply chain is an important part of the risk management process. So too is understanding the risks faced two or more tiers forward – beyond your direct customers to their target markets.

Fortunately, as with megatrends, the best weapon in the face of influencers is increased access to actionable in-formation. The fact that influencers are more targeted and likely to be associated with specific business deci-sions makes it easier to assign responsibility for mo-nitoring their potential impact..

Industry specific challenges We’ve predo-minantly addressed broad risk topics in this paper, but every industry has its own unique concerns that supply chain risk management teams need to be aware of. For example, some industries are affected by the seasona-lity of raw materials and demand, while others are driven by customer requirements, and still others are at the mercy of regularly changing regulatory require-ments. The key to success is to know your industry’s influencers and how they affect the operation of your supply chain.

Source: Business Continuity Institute/ Zurich: Supply Chain Resilience Report 2015

of distributionoriginate from below the first tier

51 %

Top risks that lead to supply chain disruption

Natural catastrophes

Political environment(emborgas, changing governmnet,

war etc.)

Globalization (increasingly specialised

global suppliers)

Source: Allianz Risk Barometer 2015

58 %

53 %

41 %

Source: Business Continuity Institute/Zurich: Supply Chain Resilience Report 2015

Consequences of Supply Chain Disruption

Loss of productivity

Customer complaints received

Increased cost of working

Loss of revenue

Damage to brand reputation/image

58 %

40 %

39 %

38 %

27 %

info@riskmethods.net • www.riskmethods.net/en

Why is SCRM a worthy challenge?

Supply chain risk management is a strategic

investment for businesses regardless of industry or location. Taking the right first step towards

understanding and addressing risk allows suppliers to move from a peripheral role into one

where they are making direct, measurable contribu-tions to operational excellence. And as the advantages

associated with the supply chain are strategically repositioned, so are the individuals and functions in the enterprise tasked with managing them. Supply

chain risk management is a competitive advantage – it provides the opportunity for procurement and supply

chain functions to play a pivotal role in the company and to position themselves as a strategic partner

in the success of the entire company.

Success Factors If you have accepted that your company is part of a supply chain, and that risk is an unavoidable part of doing business, the only step left is to determine how you will assess the effectiveness of your supply chain risk management efforts.

Increased Application and Distribution of Information: Since supply market intelligence plays a key role in managing all types of risk, increasing cross-functional access to information is a material way to emphasize risk management. But it’s not just the transparency of information that matters – one has to avoid the crying wolf syndrome. The critical element is filtering the infor-mation dissemination so the audience doesn’t ignore the cry when it really comes.

Shared Vision: Each function in the organization – procurement, supply chain, finance, marketing, human resources, etc. – likely perceives risk differently and takes a different approach to managing it. Having an enterprise-wide definition of risk as a precursor to hel-ping each function connect their work to that definition, will ensure that risk management priorities are consistently carried out.

Process Integration: Rather than being an afterthought, or an additional step in each organizational process, risk management should be a constant part of the pro-fessional mindset. Not only does this ensure that the risk impact of each decision is thoroughly considered, it en-sures that each function is on the lookout for changes to the risk landscape, including changes in current risk influencer status or the introduction of new risks.

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