While supply-chain risk management has achieved headline status over the past decade, not all organizations address risk effectively. A confluence of forces, including global terrorism, natural disasters and financial crises-coupled with market-changing consolidations such as International Paper's recent acquisition of Temple Inland-has fostered supply disruptions and price volatility that have elevated the subject to C-level consciousness.
In the recently-published The Chief Supply Chain Officer Report (Lee, O'Marah, John, 2012), more than 80 percent of the 1,400 Supply Chain leaders surveyed reported disruptions over the past two years, with more than one-third experiencing lost revenue, profits and/or market share. More than two-thirds of respondents fear the potential of "shipping disruptions, incidents at supplier facilities and the failure of key suppliers...to negatively impact their business during the next 12 months," but despite these concerns, no industry standard for assessing supply risk exists today.
The impact of supply disruptions on corporate valuation is staggering. In the oft-cited 2005 study, The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility, researchers Kevin Hendricks and Vinod Singhal found that corporations suffered a 33 to 40 percent loss in stock value over a three-year period, as well as a nearly 14 percent increase in stock price volatility.
Risk is relative, as is risk tolerance. A one-week interruption of component supply could go virtually unnoticed at a traditional manufacturer with extensive inventories and make-to-plan operations. On the other hand, a "just-in-time," make-to-order manufacturer could miss critical orders and jeopardize market share.
While there is no one-size-fits-all solution, the need to view risk in relative terms poses a challenge for leadership accustomed to measuring performance vs industry benchmarks. Facing heightened sensitivity and lack of robust tools, our clients are increasingly seeking the consult of our hundreds of supply market experts to help address the issues. Here's a glimpse of what we tell them:
• Define the supply network. Determine the level of granularity at which your supply networks will be analyzed. Measurement at the Category-Commodity-Supplier level can be applied at virtually any corporation, for both direct packaging materials and indirect goods and services.
• "Dimensionalize" your risks. Determine the broad risk categories that are relevant to your organization and their relative impact potential. A multi-national manufacturer with an intricate global supply network may emphasize geopolitical risks; a virtual manufacturer may emphasize supplier performance measures.
• Establish a set of specific and meaningful metrics that serve as risk indicators, using a mix of external inputs (such as published indices and analyst reports) and internal data, with a bias toward objective, quantitative measures. Often overlooked in this process is a sober assessment of how your organization's internal policies, processes and operations amplify risk exposure and impede responsiveness.
• Put risk in context. Once collected, processed and weighted, the above data and intelligence provide a measure of the relative vulnerability of each supply chain. This alone is meaningless without context; that is, what it is that is at risk. While two supply chains may appear to have similar levels of risk, when viewed through the lens of revenue contribution and brand impact it may be true that one supports only a small number of low-volume stock-keeping units (SKUs), while the other affects more recognizable and profitable products. That same high-risk, high-revenue item may be inexpensive and used in small quantities, and thus undermanaged by procurement organizations that tend to stratify supplier management activity by spend volume alone.
The above construct will expose and prioritize supply vulnerabilities. Translating that intelligence into effective mitigation and response strategies is a discipline unto itself. As your company evaluates risk management solutions, consider the following: Do your tools measure risk factors holistically and dynamically, in the context of business strategies and industry standards? If you cannot answer this question confidently and affirmatively, then it's time to reassess your program and the tools that facilitate its efficacy.
Brian Halpin is category management tower lead at Procurian, the leading specialist in comprehensive procurement solutions. The company's built-out Specialized Procurement Infrastructure integrates with businesses to optimize spending and deliver real savings that equal a margin point or more. For more information, visit www.procurian.com.