Risk Management In A Global Supply Chain

We are delighted to publish this article, from Milan Panchmatia, Director, 4C Associates, the first in a series of regular guest posts from our new sponsor. 4C Associates is a well established procurement consulting and managed services firm, with a 13-year track record across many different industry sectors. And if you take a look over to the right of this article you will see a 4C banner logo, which will take you directly to the company's careers page: growth success means it is currently recruiting for roles which range from graduates to senior category managers and consultants. So please do take a look. 

4cRisk management plays a vital role in the success of any major business. Knowing which risks to take, which to avoid and which to manage, can make or break an organisation.

This has never been truer than today, with global supply chains often spanning thousands of suppliers and multiple countries. The level of risk is further compounded by increasingly tight margins and specialised supply bases. In this context, the damage which can be caused by an unforeseen event, such as a key supplier going out of business or regulatory issues within the supply chain, can be devastating.

One of the most discussed events in recent times is the horse meat scandal -- a situation which arose from placing too much cost pressure on suppliers and the risk of doing so not being effectively managed. In fact, many of the measures which could have seen the scandal averted have been recommended by the subsequent Elliot Review, which calls for increased transparency and more extensive auditing.

Getting the balance right

Of course, it is impossible to guard against each of the potential risks facing a global business. All organisations operate on the principle that some risks need to be taken. However, it is identifying which risks can be managed that will allow a company to grow. Businesses need to understand the risks they are exposed to and make a conscious decision either to take a set risk, or find a way of mitigating it.

The methods used to manage risk vary depending on the industry. For example, a recent survey carried out by 4C Associates, found that the majority of professionals working in the food and drink sector believe long-term fixed price contracts represent one of the best ways to manage price risk. Many of the products sourced by food and drink buyers are vulnerable to limited availability due to seasonality, as well as weather-related shortages. In this context, long-term fixed price contracts represent the best way to ensure sustainable and secure access to key products.

The downside of the tactic is that should supply outstrip demand for a certain crop after a particularly good harvest, for example, buyers are unable to seek lower prices. However, this is far-outweighed by the fact that in the opposite case, buyers will not find themselves unable to secure a key product.

Although the types of risk can differ depending on the industry, many of the principles and techniques applied are similar. Bringing in a third party can offer invaluable insight based on best practice within other sectors and provide interesting data with regards to suppliers’ cost drivers.

Reputational risk

Another element for companies to consider when it comes to global supply chains is reputational risk. Tighter margins mean cutting costs is often a priority, however, this must not be done to the detriment of quality. Carrying out due diligence on all suppliers is the ideal approach, but is not always possible when it comes to global supply chains.

 

IKEA UK's Environment and Sustainable Development Manager, Charlie Brown, recently warned an audience at the CIPS Annual Conference about the dangers of pretending to have a sustainable supply chain. He advocated examining all stages of the supply chain in as much depth as possible to uncover risks, as being exposed could lead to significant media and customer backlash.

He added that enhancing IKEA’s green credentials was not viewed as a cost to the business, but rather as an opportunity. Getting rid of plastic bags as part of the company’s drive to be more sustainable, has saved €4 million since the policy was introduced in 2006.

Risk management and the current economic climate

Risk management is more important than ever before. Increasingly stretched supply chains and margins mean businesses have less room for error. For this reason, any company looking to be successful must have an effective strategy in place to mitigate the most dangerous risks threatening their supply chain.

Although auditing every supplier is often unfeasible, Supplier Relationship Management can help companies collaborate and drive mutual benefits. These include better visibility over production and sourcing, as well as the development of innovative cost-cutting practices.

The principles of effective risk management are identifying the risks to a business and deciding which can to be taken and which can be mitigated. Adopting this strategy will ensure the business is protected from worst-case scenarios and provide a competitive advantage when an event does take place. In this context, risk management needs to be viewed as an effective means to grow the business and not simply a costly safeguard.

 

First Voice

  1. rannel nemaura:

    really enlightened

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