Executive Briefings

Risk Management: It's All About The Supply Chain

In a way, it's laughable that we would even attempt to identify the "most likely" disasters that could affect global supply chains. The ones that actually happen always seem to come as a surprise. How many companies had an erupting volcano built into their risk models back in 2010?

Sadly lacking in psychic powers, we're forced to rely on the past as a template for divining the future. That's why we're constantly being bitten by black swans, those highly unlikely events which nonetheless seem to happen all the time.

The obvious way out of this dilemma is to focus on crafting a resilient supply chain that can recover from any number of disruptions. That's one of the conclusions of a new report produced jointly by the business consultancy Accenture and the World Economic Forum, whose annual conclave in the Swiss Alps town of Davos brings together world leaders, policy makers and pointy-headed intellectuals to talk about pressing global issues.

At a place where the topics include world economies, the future of capitalism and the Winter Olympics, it's gratifying that supply-chain management should even come up. I suppose you could call it a very thin silver lining, that so many horrific events, both natural and man-made, should have drawn attention to a subject that has long been a mystery to the man and woman on the street. I dream of the day that I won't have to explain to most people what I write about. With this new focus on risk management, that day might not be very far off.

The term was even bandied about in Davos by U.S. Homeland Security Secretary Janet Napolitano, who I doubt has spent much time over the years thinking about things like supplier stability and product quality in offshore factories. "We must continue to strengthen global supply chains to ensure that they operate effectively in time of crisis, recover quickly from disruptions, and facilitate international trade and travel," she said. "As part of this effort, we look forward to working closely with our international partners in the public and private sector to build a more secure and resilient supply chain." That's a big step forward from devising color-coded threat alerts and confiscating forks from airline pilots.

"To have the Secretary talking about supply chain is quite exciting," says Jonathan Wright, senior executive in the global operations consulting practice of Accenture. Homeland Security, he notes, has released its own national supply-chain strategy, which overlaps significantly with the findings of the Accenture/WEF report.

Another positive idea to come out of Davos was a recommendation to streamline the government bureaucracy that is charged with the schizophrenic task of stopping illegal or dangerous shipments, and simultaneously promoting international trade. "It's all about aligning policies and departments - having a common approach to supply chain from a trade and security perspective," says Wright.

The new report lays out some of the trends - globalization, Lean strategies, supplier consolidation and mass travel - that have complicated global supply chains in recent years. The conclusion: no single company can address those forces without help from a universe of supply-chain partners, both upstream and downstream.

To Wright, the key lies in setting up a "dynamic infrastructure," through access to detailed data about one's supplier base, powerful analytics and an up-to-date IT platform. Of primary importance is knowing who is responsible for key supply-chain decisions in moments of crisis. In addition, manufacturers must be able to reach up through several tiers of suppliers, to identify all of the weak points where alternative sourcing would be wise in have in place, well ahead of needing it.

Companies that outsourced their manufacturing to China over the past decade have already learned that setup costs aren't the only factor to keep in mind. The advantages of lower factory wages can be quickly erased by the need to build inventory buffers into the pipeline, and rely on expedited transportation when the main line of supply runs short. The same goes for determining how many suppliers to keep in reserve for a critical raw material, component or finished good.

While working with MIT, Wright learned how to achieve 80 percent of supply-chain flexibility goals with only a 20-percent bump in manufacturing costs. In other words, a relatively modest investment - say, the shifting of a small amount of production to another supplier - can provide a company with just enough protection to meet most contingencies.

In addition, says Wright, businesses need integrated IT architecture, including strong analytics tools that sit atop a well-stocked data warehouse. The combination of technology and human experts analyzing accurate, real-time data can help companies to detect "those early-warning signals that are associated with the vulnerabilities that we reported in the [Accenture] project."

Have any companies actually achieved this capability? Precious few, it would seem. "They have the potential, and some of the foundation," says Wright. "There's a lot more that can be done to move away from traditional planning to a more holistic, risk-based analytics capability." Unfortunately, many supply-chain managers remain focused on the needs of the moment - then have to scramble when the unexpected occurs.

That kind of short-term thinking is encouraged by the investor community, which seems to care only about the next quarter's results. Maybe the report from Davos will spark awareness of the need for investing in better risk management, even if that means higher supply-chain costs up front. If we've learned anything from the disasters of the last few years - and I'm not at all sure we have - it's that the price of being unprepared is unacceptably high. As Wright says: "It's about having one foot in the present, and one in the future."

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In a way, it's laughable that we would even attempt to identify the "most likely" disasters that could affect global supply chains. The ones that actually happen always seem to come as a surprise. How many companies had an erupting volcano built into their risk models back in 2010?

Sadly lacking in psychic powers, we're forced to rely on the past as a template for divining the future. That's why we're constantly being bitten by black swans, those highly unlikely events which nonetheless seem to happen all the time.

The obvious way out of this dilemma is to focus on crafting a resilient supply chain that can recover from any number of disruptions. That's one of the conclusions of a new report produced jointly by the business consultancy Accenture and the World Economic Forum, whose annual conclave in the Swiss Alps town of Davos brings together world leaders, policy makers and pointy-headed intellectuals to talk about pressing global issues.

At a place where the topics include world economies, the future of capitalism and the Winter Olympics, it's gratifying that supply-chain management should even come up. I suppose you could call it a very thin silver lining, that so many horrific events, both natural and man-made, should have drawn attention to a subject that has long been a mystery to the man and woman on the street. I dream of the day that I won't have to explain to most people what I write about. With this new focus on risk management, that day might not be very far off.

The term was even bandied about in Davos by U.S. Homeland Security Secretary Janet Napolitano, who I doubt has spent much time over the years thinking about things like supplier stability and product quality in offshore factories. "We must continue to strengthen global supply chains to ensure that they operate effectively in time of crisis, recover quickly from disruptions, and facilitate international trade and travel," she said. "As part of this effort, we look forward to working closely with our international partners in the public and private sector to build a more secure and resilient supply chain." That's a big step forward from devising color-coded threat alerts and confiscating forks from airline pilots.

"To have the Secretary talking about supply chain is quite exciting," says Jonathan Wright, senior executive in the global operations consulting practice of Accenture. Homeland Security, he notes, has released its own national supply-chain strategy, which overlaps significantly with the findings of the Accenture/WEF report.

Another positive idea to come out of Davos was a recommendation to streamline the government bureaucracy that is charged with the schizophrenic task of stopping illegal or dangerous shipments, and simultaneously promoting international trade. "It's all about aligning policies and departments - having a common approach to supply chain from a trade and security perspective," says Wright.

The new report lays out some of the trends - globalization, Lean strategies, supplier consolidation and mass travel - that have complicated global supply chains in recent years. The conclusion: no single company can address those forces without help from a universe of supply-chain partners, both upstream and downstream.

To Wright, the key lies in setting up a "dynamic infrastructure," through access to detailed data about one's supplier base, powerful analytics and an up-to-date IT platform. Of primary importance is knowing who is responsible for key supply-chain decisions in moments of crisis. In addition, manufacturers must be able to reach up through several tiers of suppliers, to identify all of the weak points where alternative sourcing would be wise in have in place, well ahead of needing it.

Companies that outsourced their manufacturing to China over the past decade have already learned that setup costs aren't the only factor to keep in mind. The advantages of lower factory wages can be quickly erased by the need to build inventory buffers into the pipeline, and rely on expedited transportation when the main line of supply runs short. The same goes for determining how many suppliers to keep in reserve for a critical raw material, component or finished good.

While working with MIT, Wright learned how to achieve 80 percent of supply-chain flexibility goals with only a 20-percent bump in manufacturing costs. In other words, a relatively modest investment - say, the shifting of a small amount of production to another supplier - can provide a company with just enough protection to meet most contingencies.

In addition, says Wright, businesses need integrated IT architecture, including strong analytics tools that sit atop a well-stocked data warehouse. The combination of technology and human experts analyzing accurate, real-time data can help companies to detect "those early-warning signals that are associated with the vulnerabilities that we reported in the [Accenture] project."

Have any companies actually achieved this capability? Precious few, it would seem. "They have the potential, and some of the foundation," says Wright. "There's a lot more that can be done to move away from traditional planning to a more holistic, risk-based analytics capability." Unfortunately, many supply-chain managers remain focused on the needs of the moment - then have to scramble when the unexpected occurs.

That kind of short-term thinking is encouraged by the investor community, which seems to care only about the next quarter's results. Maybe the report from Davos will spark awareness of the need for investing in better risk management, even if that means higher supply-chain costs up front. If we've learned anything from the disasters of the last few years - and I'm not at all sure we have - it's that the price of being unprepared is unacceptably high. As Wright says: "It's about having one foot in the present, and one in the future."

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