Executive Briefings

New Emphasis on Risk Management Causes Companies to Consider More Than Just Cost When Sourcing Product

It should come as no surprise to anyone that most of the companies recently surveyed by Marsh Inc. reported a sharp rise in supply chain risk levels. The exact number is 73 percent, according to Beth Enslow, senior vice president of supply chain risk management with Marsh. An identical percentage of top-level executives expressed concern about the impact of supply chain resiliency and product safety on brand equity, earnings volatility and working capital. Speaking at the annual conference of the Council of Supply Chain Management Professionals, in Denver, Enslow cited another study which found up to 44 percent of companies reporting a drop in stock price following the announcement of a supply chain disruption. Yet according to the Marsh study, only 13 percent of respondents believe their risk management strategies to be even "moderately effective."

David Simchi-Levi, professor of engineering systems at MIT, described the various methods for minimizing risk, including greater flexibility and speed in moving product to market, redundancy of supply, better network planning and more risk-sharing among supply chain partners. In theory, he said, manufacturers can embrace modular product design, allowing for the rapid switchover from one supplier to another. They can also retool their plants to turn out multiple product lines. But those strategies, while effective, can be extremely costly, Simchi-Levi said. A better plan might call for partial flexibility of production and supply, while spreading the risk through shared forecasting with suppliers and customers. One maker of consumer packaged goods, employing network modeling techniques, closed 17 of its 40 worldwide manufacturing sites, taking $40m of cost out of the supply chain, Simchi-Levi said. Jennifer Pritchard, vice president of production and sourcing with women's fashion retailer Chico's FAS, said her company has adopted a "China Plus One" strategy for sourcing. The plan involves the use of manufacturers in Southeast Asia to supplement Chinese production. In the process, Chico's has offset some of the additional expense caused by rising inflation and labor costs in China. Pritchard said the company might eventually switch to a "China Plus Two" approach, in a move to further diversify its supply base. As Enslow said: "When you put a risk lens onto these operational decisions, you often come up with much different strategies."

Visit www.marsh.com

It should come as no surprise to anyone that most of the companies recently surveyed by Marsh Inc. reported a sharp rise in supply chain risk levels. The exact number is 73 percent, according to Beth Enslow, senior vice president of supply chain risk management with Marsh. An identical percentage of top-level executives expressed concern about the impact of supply chain resiliency and product safety on brand equity, earnings volatility and working capital. Speaking at the annual conference of the Council of Supply Chain Management Professionals, in Denver, Enslow cited another study which found up to 44 percent of companies reporting a drop in stock price following the announcement of a supply chain disruption. Yet according to the Marsh study, only 13 percent of respondents believe their risk management strategies to be even "moderately effective."

David Simchi-Levi, professor of engineering systems at MIT, described the various methods for minimizing risk, including greater flexibility and speed in moving product to market, redundancy of supply, better network planning and more risk-sharing among supply chain partners. In theory, he said, manufacturers can embrace modular product design, allowing for the rapid switchover from one supplier to another. They can also retool their plants to turn out multiple product lines. But those strategies, while effective, can be extremely costly, Simchi-Levi said. A better plan might call for partial flexibility of production and supply, while spreading the risk through shared forecasting with suppliers and customers. One maker of consumer packaged goods, employing network modeling techniques, closed 17 of its 40 worldwide manufacturing sites, taking $40m of cost out of the supply chain, Simchi-Levi said. Jennifer Pritchard, vice president of production and sourcing with women's fashion retailer Chico's FAS, said her company has adopted a "China Plus One" strategy for sourcing. The plan involves the use of manufacturers in Southeast Asia to supplement Chinese production. In the process, Chico's has offset some of the additional expense caused by rising inflation and labor costs in China. Pritchard said the company might eventually switch to a "China Plus Two" approach, in a move to further diversify its supply base. As Enslow said: "When you put a risk lens onto these operational decisions, you often come up with much different strategies."

Visit www.marsh.com