Risk Managing the Supply Chain

Spend Matters is pleased to bring a guest post from Richard Rich, giving us insight into risk mitigation within the supply chain.

Risk managing the supply chain is a strategic planning tool that supply chain executives can use to increase efficiencies, mitigate risks before they cause damage, and negotiate and manage critical contracts and strategic alliances. Different supply chains are driven by the organizations that they serve and the business/strategic plans they forge to guide them. That difference guides how an SCM executive would risk manage the supply chain. Understanding the type of business a specific supply chain serves and its subsequent role is fundamental to its risk management.

Some Supply Chain professionals are critical of my approach, thinking it's too involved -- a "Tempest in a Teapot," if you will. They argue that you can manage the supply chain reactively. My approach, however, is proactive management. The theory is to strengthen and improve, and to avoid problems before they happen. It's my belief that there's no better approach to supply chain effectiveness.

Let's begin with an organizational meeting of the individuals who have the most "skin in the game," the Risk Champion, Risk Owner and the ERM Leader (detailed descriptions for these people later). This organizational meeting must deal with thoroughly understanding the business, the business plan, how it's organized and what role the supply chain plays. Is the supply chain centralized? Is it managed to support all direct and indirect spending in the manufacturing context? Or in a utility context, does it purchase all fuel, construction, office supplies and services? Knowing exactly what is purchased and who the major internal customers are is extremely important.

Further to this point is the fact that manufacturing businesses have different supply chains, often offering very different lines, and therefore different supply chain functions. This has an impact on how the chain can be risk managed. Risks that befall Eli Lilly, a pharmaceutical manufacturer, may not apply to Boeing's supply chain.

Once the supply chain is defined, we then must conduct an investigation of its inherent problems and risks. This is not a drill down exercise on a specific problem in the supply chain; it is an investigation of all of the parts and entities that create the whole, and occurs before a possible disruption even takes place. To handle this reactively, something happens and the SCM Professional reductively investigates the problem as fast as he/she goes forward to make the supply chain function.

George W. Alijian, in his Purchasing Handbook, talked of a Purchasing Objective: to purchase the right item, in the right quantity and quality, from the right source, at the right time. This objective, broken down to its most basic form, serves us well in defining risks that exist in the chain, and establishes risk connections that can provide further investigation. Price, quality, and sourcing are some risk conditions that are apparent in the stated objective. Transportation, storage, distribution, form of contract, and third party solvency are still more risk conditions, and there may be even more depending on the environment. This exercise defines the conditions that exist for a specific supply chain, and should explore any condition that disrupts the objective as stated.

To complete our initial analysis of the supply chain, it's crucial to establish team members to perform the analysis through the facilitation of a risk management pro. There should be three team leaders -- the Chair of the project is called the Risk Champion. The risk champion has direct access to the CEO, access to his / her peers and can bring resources and leadership to the day-to-day functioning of the project. The executive has the most clout, and I suggest that this is the major internal user / customer of the supply chain. The Chief Procurement Officer (CPO) should be the Risk Owner. The Risk Owner is the day-to-day operative and supervisor of the project, leaning on the risk champion as needed. He is also the most knowledgeable of the subject matter experts (SMEs). The third member of the management of the project is the Risk Management Pro. He / she is responsible for coordinating the team meetings, agendas and logistics. He/she also facilitates all discussions, keeps the project on track and leans on the risk Champion when needed for resources or participation.

The last (and extremely important) part of the team are the subject matter experts (SMEs). These are people who have hands-on experience -- the users or internal customers of the supply chain, the suppliers in the supply chain, the supply chain professionals and possibly consultants to the buyers and the sellers who bring unique experience to the endeavor. They deeply understand a supply chain's inherent strengths and weaknesses.

After establishing a team, the initial charge is to investigate the supply chain. A Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis determines where opportunities exist to improve or strengthen the supply chain. The results tell us what risk should be specifically analyzed and what mitigation strategies to implement, essentially defining the work plan for risk analysis. SMEs analyze for improvements, efficiencies and strategic planning opportunities. By reviewing all possible risk conditions, the SWOT will take shape.

The team as a whole then thoroughly analyzes the chain. Appropriate outcomes could be the creation of a strategic plan for a supply chain, defined which risks require immediate analysis. It's also a means to strengthen critical supply relationships and improvements within the supply chain. An interesting by-product of all of this is the documentation, which prevents "re-inventing the wheel." This gives a base on which you can be a flexible player in the organization, grow the supply chain, and change or adapt to volatile conditions.

- Richard Rich

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