Does Supply Chain Risk Management Matter For Services?

We hope those of you who tuned in for our webinar last week with riskmethods, titled "Making the Case for Supply Chain Risk Management", found it useful. If you registered but didn’t make it on the day, please do take a listen. And if you didn’t register, you can still get hold of the recording here on demand - and there is a paper on the same topic, titled Making the Case for SCRM available here, free to download.

We ran out of time during the webinar before we had the chance to answer one question, which we thought was worth coming back to today. It was this “The presented approach in the webinar for supply chain risk management (SCRM) is very much oriented towards (procurement of) goods.  How would this apply to services, as we see much more As-a-Service components are entering our supply chains”?

In the past, services were perhaps not considered as critical as goods in terms of supply chain risk, it is fair to say.  Our view of risk focused on issues such as the risk to manufacturing output if a supplier of a critical raw material or component had a problem – a fire or strike affecting their factory, or a natural disaster (earthquake, flood) that impacted on supply.

A problem with our facilities management provider, or the offices of a legal or consulting firm being affected by fire, just did not seem likely to have the same impact.

However, there are two caveats to that. Firstly, some services really are critical; logistics-related for instance. A strike in the transport system can have major effects on businesses; risks around utilities supply would be another example where “services” can be just as important as goods.

Secondly, the line between “goods” and “services” in manufacturing has become increasingly blurred.

Let’s say an automotive manufacturer buys in an assembled transmission system. Is that “goods” – it is a physical item, after all? Or is the firm buying the “service” of putting together hundreds of different parts into a finished system?

Actually, the semantics of it don’t matter too much. What is clear is that the risks around that supplier need to be considered very carefully – this is clearly a critical supplier, and we would want to understand the whole range of potential risks associated with the firm very carefully.  And it is not just in a manufacturing environment that this blurring has taken place. At one point, we all bought software as a physical item – remember the discs that were loaded into PCs or indeed larger computers and provided the software that we used? Now, we buy “software a s a service” and there are no physical goods.

But arguably, while the total business risk is probably no greater, the supply chain risks may be greater than they were previously. When we had software on-premise, we had control of the risks, but now we are more reliant on the SaaS provider – if their servers crashed, or their premises were destroyed in an earthquake, we might have a problem.

Rolf Zimmer, founder of riskmethods (who spoke during the webinar alongside me), summed it up like this. “If we are talking 'contract manufacturing services' in effect, the arguments for SCRM are the same as for goods. If it’s 'real' services, then the answer is slightly different. In this case there’s no actual physical supply chain to be monitored, however, all other SCRM aspects that are related to the supplier entity are still valid. For example, you probably want to know if there’s a power outage in the area where one of your key service providers is located, or if one is having financial problems”.

So, in conclusion, I think our answer to the question is really “it depends”. Don’t work on the basis that goods versus services is a particularly useful guide when you consider supply chain risk. Look at every case, every supplier and supplied “item” – goods or services – on its own merits. Analyse the risks based on where that purchase fits into your overall business, and consider how risk events would affect you, and what you can do to manage that risk, wherever it might arise.

And do have a listen to us if you missed the webinar first time around!

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First Voice

  1. Toni Allardyce:

    I find the entire concept of risk management in my industry a complete waste. I work in food. Management is only concerned with the cheapest ingredient and the best price to get and the lowest labor costs regardless of meeting the regulatory requirements. I have recently been accused of sabotaging our supplier by asking relevant questions and proof of claims – documentation studies approved by the regulatory agencies. The supplier went ballistic and said they don’t want to business with us – since I got them in trouble. The owners of our company blame me – saying I am going too far in “vetting” our suppliers and should just be happy with the incomplete studies.
    I have experienced this in many companies where production, profit are deemed more important than quality and food safety- WHY is this accepted?

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