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The globalization of supply chains, combined with cost-cutting measures, has exposed organizations to new levels and types of risk.
Many companies simply do not have the risk management processes and structures in place to deal with these risks. Accenture identifies six steps for improving supply chain risk management and helping companies balance financial efficiency and control over their supply chain.
Recent events—including the Japanese earthquake and tsunami, the floods in Thailand and the ash clouds caused by the Icelandic volcano—have demonstrated how far the consequences of such risks can extend. The incurred losses were a warning to C-level executives across the globe about how exposed their supply chains can be.
Aside from these headline events, however, the nature of supply chain risks is constantly changing. New risks and new vulnerabilities require close attention from management. Counterfeited products, for example, have entered supply chains in greater numbers and can inflict lasting damage to a company’s product quality and reputation. Original equipment manufacturers seeking to ensure the continuity of their operations have increasing concerns about supplier solvency at times of high volatility of financial markets or currencies. The financial crisis that emerged in 2008 has shown how reduced access to credit can impact the less financially stable companies and create headaches for supply chain managers.
Current supply chain fragilities are not just related to emerging risks; they are as much a result of supply and network design strategies as they are driven by a limited integration of risk management into supply chain management.
In light of these and other concerns, companies recognize the need for a more formal management of supply chain risks. They need to rethink their operative model to define an optimum balance between financial efficiency and control over the supply chain.
New supply models are generating new risks. The current focus on Lean strategies using the kaizen model has meant that just-in-time production has become more common, resulting in reduced inventories and so increased risk if suppliers run into problems. The decision to buy rather than make means that companies lose oversight of key governance and management strategies, and introduce unknown risks into the supply chain.
The globalization of the supply chain as companies switch from local to low-cost suppliers introduces further risk because there are many more potential points of failure. A global supply chain also increases risk related to supply chain integrity, compliance and quality control.
Classic risk management methods have proven inefficient in addressing these new supply chain risks. Most companies are also operating with insufficient insurance cover of key risks, and insurers themselves often do not understand the nature of these new supply chain risks. In addition, most companies lack a risk management function in the supply chain.
There are a number of effective approaches to dealing with new types of supply chain risk. One of the most important principles is to start with increasing the visibility of inherent risks; it is impossible to plan for and difficult to manage risks that have not been envisioned. Unforeseen events of recent years have shown that limited risk scenario analysis and planning lead to gaps in the risk management framework.
Accenture recommends the following steps for integrating risk management into business operations and thus making it more effective:
Look at the whole, not just the parts. Most risks should be managed across the supply chain network because they are systemic.
Review the governance of the organization’s risks. Risk functions have less ability to ensure that the scope of risks under consideration is adequate.
Review current operating models. This includes a review of risks embedded into a company’s operating model, and all procedures and controls intended to manage them.
Integrate risk management into operations planning and management, both in terms of functions and workflow. Risk management needs to move out of the head office to provide input into the daily decision-making process for operations.
Use a financial modeling capability for the supply chain. Advanced supply chain modeling tools are essential for scenario planning as well as supply chain design and risk quantification.
Improve risk reporting and monitoring. Risk management benefits from performance management systems that help monitor key performance indicators to identify problems and take corrective measures.
Carlos A. Alvarenga is the Accenture global lead, Operations Finance and Risk, and Senior Research Fellow at the Robert H. Smith School of Business, University of Maryland.
Eric E. Lehmann is senior manager within Accenture’s Cross-Industry and Resources Risk Management team. Based in London, he has more than 13 years of experience advising multinationals on assessing and improving their risk management capabilities. He combines deep risk management experience with strategy and change management skills to help clients become and remain high-performance businesses.
July 19, 2012
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