How Organizations Assess Supply Chain Risk

Spend Matters welcomes another guest post from Becky Partida, research specialist of supply chain management at APQC.

Natural disasters and political turmoil have made supply chain management professionals think differently about risks to supply chain stability and resiliency. In 2013, APQC conducted a survey of supply chain and finance professionals to learn how they view and address three specific risks to supply chains:

  • „  natural disasters (such as tsunamis and earthquakes)
  • „  extreme weather events
  • „  political turmoil in important world regions

The survey collected responses from 196 organizations that represented more than 22 different industries. Eighty-three percent of respondents had experienced at least one unexpected supply chain disruption in the last 24 months. Of that group, 78 percent experienced a disruption significant enough to have required the sustained attention or intervention of the top executives at their organizations.

To determine how organizations are addressing supply chain risk, APQC asked respondents to indicate how often they conduct assessments of their supply chains’ resiliency and exposure to potential disruption risk. About half indicated that they conduct these assessments every 12 months or less, but the second largest group of respondents (40 percent) indicated that they conduct these assessments sporadically or only after a major disruption (see the figure below). In addition, 5 percent of respondents never conduct assessments of their supply chains at all.

Figure 1 May

In another survey question, APQC asked respondents to indicate the types of assessments they use to evaluate potential supply chain risk. As the figure below shows, the largest group of organizations (48 percent) uses informal risk assessments such as site inspections and conversations with suppliers’ managers. The second largest group (40 percent) relies on the judgment of procurement and operating professionals to determine potential risks.

Figure 2 May

APQC also looked at how frequently organizations conduct formal risk assessments of their suppliers. Respondents were asked to indicate assessment frequency for strategic or critical suppliers; preferred or important suppliers; and all other suppliers.

The table below presents the frequency of assessments for the strategic and preferred supplier types. For each supplier type, the largest group of respondents conducts assessments every 12 months or less. However, 9 percent of organizations never conduct formal assessments for strategic suppliers and 11 percent never conduct these assessments for preferred suppliers. With much potential supply chain disruption risk associated with key suppliers and their suppliers, these organizations leave themselves open to a major supply chain disruption that could be avoided through an advance assessment of risk.

Table 1 May

APQC’s survey results indicate that there is room for organizations to improve their strategies and processes for mitigating risk. For example, many respondents indicated that they use informal procedures and procurement staff sentiments to assess potential supply chain risk. Although these strategies make some progress toward identifying threats to supply chain continuity, they may not be sufficiently thorough.

APQC stresses the importance of identifying all potential risks and assessing the impact of these risks on business continuity. This involves not only a close examination of the organization’s weak points, but also sources of potential disruption for multiple tiers of suppliers. Organizations are accomplishing this through close relationships with key suppliers built on the promise of mutual benefit. For example, ATMI, a provider of technologies for the semiconductor, life science, and flat panel display industries, used its close supplier relationships to create an alert system to help mitigate the risk of disruptions due to natural disasters. The system is focused on the organization’s top revenue-generating products and maps each product through multiple tiers of suppliers to its base elements. If an event occurs, ATMI’s supply chain team can determine which products and suppliers might be affected. In some cases the alert system has made ATMI aware of an event before its suppliers were aware they were affected.

APQC also emphasizes the importance of having a recovery plan in place for when a disruption does occur. This allows the organization to take immediate action, and can lead the organization to quickly find alternative sources of materials or make other changes within its supply chain if necessary. Ultimately, the level of sophistication organizations need for their risk assessment and mitigation strategies should be based on their industries and the span of their operations. The time and investment necessary to assess and mitigate risk may be worth it in comparison with losses that can be caused by a serious supply chain disruption.

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