Five Supply Chain Risk Management Mistakes That Could Cost Your Business a Fortune (Or Cost You Your Job!)

Most procurement and supply chain organisations have some understanding of risk management, and have some plans in place to address risk.

However, in many cases, their approach to risk management is built on shaky ground, based on myths, fallacies or simple lack of knowledge. Here are five critical weaknesses we have come across in many supply chain risk strategies, expressed as some of the misguided comments we have heard from senior managers. Any of these fallacies (or complacencies) could lead to hugely expensive, disruptive or even terminal results for the organisation – and for individuals’ careers.

“We focus our risk efforts purely on our top suppliers – applying pareto makes sense”

Some organisations look at their top 30 suppliers by value, or those suppliers that make up 80% of their spend, and focus risk efforts on those. But this is a case where ‘pareto’ analysis takes the buyer down the wrong path. Risk effort needs to be focused on those suppliers where a) the chance of a risk event occurring is greatest (although it is not always easy to identify which suppliers fall into this category) and b) the impact if it did happen would be most severe.

A firm might spend only a few thousand euros a year with a supplier, but if a supply problem with their material or components could result in major manufacturing delays or even shutdown, then this is a truly critical supplier and needs to be treated as such.

“We analyse and approve all our new suppliers when we on-board them – that is enough to protect us”

Well done! That is a sensible step. However, the problem is that things change. Firms can quickly get into financial trouble. Labour disputes can arise from seemingly trivial issues. The likelihood of a natural disaster affecting their plant might increase because of changing weather conditions, or the supplier’s own internal strategy might increase the risk for the buyer. Remember, from Enron to Lehman Brothers to Hanjin Shipping, almost every firm that goes out of business once had a great credit rating.

The only way of handling this is through continuous review and assessment of the supply base. What is their latest financial position? Are they affected by anything happening this week, whether strike or earthquake? Keeping on top of the latest information and analysis is vital.

“We have great supplier relationships – they will tell us if anything is happening we should know about”

Do you really believe that? If you do, you are perhaps too naïve to be working in procurement! Buyers find out about suppliers going bust the day the receiver is appointed, in our experience. And the sales person may not even know themselves that the firm is in trouble. Similarly, no sales director is going to volunteer the fact that workers are close to walking out over a pay dispute. Then there are the many events that no-one can predict with certainty – there is no way you are going to be told weeks in advance about an earthquake.

“We’ve worked with this supplier for 20 years and never had a problem”

That may mean that the risk probability is indeed very low, or perhaps you have just been lucky. If the chance of a major risk event is 1 in 20 in any given year, then you might well go 20 years without anything happening. But there is a 50% chance that sometime in the next ten years an event will occur, and a 5% chance it will be this year.

Or maybe things have changed. The supplier may have opened new factories in locations that are intrinsically more risky, or has new management or financing that might make disruption from other sources more likely. Whatever the driver, a lack of problems in the past might indicate a relatively risk-free future, but no-one can be certain of that. Diligence now is the only answer.

“We have more than one supplier for all our key purchase items”

But what if it is a problem at the second tier in the supply chain? Perhaps all your immediate suppliers buy a critical material from the same provider, so if that firm has a problem so do all your suppliers. Then there is a question of timing. How long will it take to move your spend from one supplier to another if something does go wrong? And what if everyone in the market is doing the same; there have been cases where a fire for instance at one plant causes other providers to hit capacity constraints very quickly. Remember, if you are chased by a bear, you don’t have to run faster than the bear. You just have to run faster than the other person who is being chased by the bear!

So, in conclusion: don’t rely on hope and history. A risk event may not be avoidable, but those who react most quickly and have plans in place to address it will be best placed to escape with the least damage.

 

This is the first in a new monthly series of articles addressing supply chain risk issues, in conjunction with our sponsors riskmethods, who provide technology that helps firms monitor risk, minimise the impact and proactively take action to mitigate risk.

 

 

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