Many seasoned businesses knew the risks associated with becoming part of a global supply chain but chose to accept them for the benefit of lower costs. This, however, is no excuse for not trying to manage the risks.

In a recent Accenture study that surveyed 151 logistics executives in United States firms with revenues of more than $1 billion, more than two-thirds of the companies said they had experienced a supply chain disruption from which it took more than one week to recover.

Furthermore, the study revealed that 73 percent of the executives surveyed had a major disruption in the past five years; of those, 36 percent took more than one month to recover. Additionally, the vast majority of respondents (94 percent) said disruptions — most often caused by problems associated with supply chain partners, raw materials and natural disasters — impact profitability and the ability to meet customer expectations.

Accenture's findings were noted by CRMBuyer last month, along with a detailed description of why ERP and MRP cannot solve this problem and why even deterministic simulation cannot manage risk; the unknown cannot be simulated.

Industrial engineer Mark L. Spearman suggests viewing a manufacturing supply chain in terms of stocks and flows with flows representing demand and transformation. The latter he considers an outflow. The stocks present a way to coordinate the flows. He further notes that buffers can synchronize transformation and demand. Extra time and extra capacity permit matching of demand and transformation, according to Spearman. The buffers between them are time, capacity and inventory. To manage risk and possible risk, a person must use one or some combination of these buffers to reach an optimal manufacturing scenario.

With dynamic risk-based planning and scheduling (DRPS), for instance, the manager needs only to "monitor projected inventory and projected service levels and then control a few key parameters — reorder points or lead times, production quantities (lot sizes), installed capacity, makeup capacity, work in progress level and the virtual queue," Spearman adds.

Insight, Inc. offers the following five tips for thinking about supply chain risk:

• Critically evaluate global sourcing options;
• Plan strategically, implement tactically (Plan from the top down);
• Optimize, don't just automate;
• Acknowledge risk and "self-insure" with resilience; and
• Commit to continuous improvement.

A look at an AMR Research report earlier this year shows some valiant attempts to achieve minimal risk while managing supply chain relationships and pleasing customers with quality, delivery and price. The following are some broad actions taken by nine leading companies to manage supply chain risk:

• Locking up so much capacity, a competitor couldn't launch a similar product along with recognizing critical commodities and suppliers as well as understanding risk exposure and mitigating risk;
• Securing volume discounts, managing customs delays and structuring contracts to reduce risk while cutting procurement costs and collaborating with suppliers;
• Ensuring continuity, especially for new products, and creating contract relationships characterized by flexibility and agility. Also, one company uses dynamic modeling to understand supply risk and mitigation better;
• Refining scenario planning and ranged forecasting, and then positioning to respond to upside and downside events in the forecast;
• Using promotions to reduce inventories when they're too high and selling hedges and capacity reservations to customers;
• Paying an option-type premium to reserve capacity and permit delays on decisions about details;
• Involving other internal business groups in a stock-market style bid to estimate the product forecast;
• Communicating constantly with suppliers; and
• Analyzing the supplier base in detail, quantifying financial impact on a net present-value basis of a supplier failure and using this to determine the best course of action.

Labor, too, is a risk factor.

In a manufacturer's ideal world, labor could be increased or decreased to meet demand. We all know of retailers hiring salespeople for the holiday rush and perhaps packers at warehouses for Internet-generated sales during peak seasons. Even Wal-Mart has attempted to do this in retail with what it terms "open availability."

One particular group creating vulnerability is illegal workers. A Purchasing article entitled "Risk Management: Immigration Issue Impacts the Supply Chain" last month said that if a government agency raids a manufacturer's plant and immigrants are dislodged, this introduces risk for the entire supply chain. The report also noted that while "less than 4 percent of buyers said their supply chains have been impacted by immigration issues and only one said it was the result of an immigration raid … several respondents said they saw suppliers struggle when illegal workers went to their home countries for holidays and did not or could not return."

It is easy to suggest switching to another supplier, but even if another supplier exists, it probably would have some difficulty and delay in ramping up to replace a sizable quantity of products lost due to a raid. In a survey by Purchasing, 94 percent of buyers polled said they currently do not ask their U.S.-based suppliers anything related to their workers' immigration status. When you think about the risk of damage to a supply chain due to raids, this creates a dilemma for businesses. Is it best to ask if a supplier uses illegal workers before entering an agreement, knowing you may be jeopardizing the lowest cost to eliminate a risk, or pay the least and accept the risk?

One answer does not fit all situations, as the decision may depend on how easy or difficult it is to replace a supplier, and how many and how large other risks exist in the supply chain.

In the end, the responsibility of managing supply chain risk does not just fall on managers; it is everyone's responsibility in the procurement and operations world to think through the many supply risks.

Resources

Globalization Risks Require Continuity in Strategic Supply Chain Planning
Insight, Inc., March 23, 2007

The Yin and Yang of 21st-Century Supply Chain Risk
by Mark Spearman
CRMBuyer, March 26, 2007

Risk Management: Immigration Issue Impacts the Supply Chain
by Dave Hannon
Purchasing, March 21, 2007

Selling Wal-Mart
by Jeffrey Goldberg
The New Yorker, April 2, 2007

Other Resources

Common Sense: Measuring Your Supply Chain
by David Blanchard
IndustryWeek, March 1, 2007

Achieving Competitive Advantage Through Supply Chain Management
by John T. Mentzer
Industry Week, Jan. 10, 2007