In today’s business environment the management of risk has been dramatically growing as perhaps the number one reason companies have become more focused on their ability to more flexible and adaptive. Much of it has to do with the accel-eration of complexity in all facets of business. As the impact of such sources of supply chain risk as natural disasters, global recession and the tightening of credit markets, strikes and bankruptcies, the price and supply of oil, and port congestion and infrastructure inadequacy dominate the headlines, the heightened exposure of supply networks brought about by a decade-long mandate to decrease inventories and cost everywhere in the supply chain has become painfully visible. Simply put, unplanned events occurring anywhere in an organization’s extended supply chain, from process failures to faulty sourcing strategies, can result in catastrophic supply chain disruption.
As illustrated in Figure 4.5, risk in today’s supply chain can be located in four areas.
Business Environment.
◾ There can be little doubt that the prime drivers of risk today can be found in globalization and increasing business complexity.
Globalization has required businesses to cope with unprecedented levels of coordination among geographic operations incorporating everything from cultural nuances to languages, currencies, and regulatory (tax, import/export) structures to expanding lead times and corresponding increase in costs,
uncertainty, and erosion of control. As the second decade of the twenty-first century opens, companies also have to come to grips with ballooning fuel and energy costs, tightening of global credit markets and financial recession, and eenvironment-related tax credits and regulation of carbon emissions.
Customers
◾ . Several factors coalescing around the growing power of the cus-tomer have made supply management problematical. To begin with the hypercompetitiveness of today’s global markets have increased the volatility of demand, escalated requirements for product customization and variety, shortened product life cycles, and intensified expectations of a personalized buying experience. In addition, the ubiquitous power of the Internet has resulted in declining customer loyalty and continuous downward spiraling of prices. Such marketplace realities have resulted in a swelling of the supplier base, increased dependence of channel partners to maintain branding and promotional marketing, and product management with all of the attendant
• Increasing globalization
• Increasing business complexity
• Increasing lead times and decreasing control
• Spiraling fuel and energy costs Business environment
• Focus on sharing risk, trust, and mutual benefit
Figure 4.5 Risks to SCM.
complications of integrating components into the final product, and manag-ing larger and larger volumes of purchase orders, invoices, and so on.
Suppliers
◾ . While one of the prime targets of lean SCM in the search to con-tinuously reduce costs, improve quality, and shrink cycle times, supplier management has also been a critical source of risk. As companies expand their use of outsourcing strategies, intensify their search for supply partners willing to broaden and deepen commitment and partnership, engineer joint process improvement, and more closely synchronize special competencies enabling whole network ecosystems to better manage risk while sharing ben-efits, companies’ growing dependence on lean supplier management practices pose severe risks to supply chain effectiveness. One of the key mantras of lean—single sourcing—while enabling reductions in price and administra-tive costs, can also increase the vulnerability of supply chains if the supplier can not perform or even goes out of business. Beyond supply continuity dis-ruption and price volatility, supplier consolidation can inadvertently create bottlenecks in the supply chain that can stress resources and suppliers to the breaking point. Even corporate moves, such as an acquisition, can introduce risk with the addition of relatively unknown suppliers and new assets that can traverse the entire supply chain.
Then again, while outsourcing can reduce costs and activate new sources of productive competencies, it also can dramatically expand the possibility of supply chain disruption. Persuading even close partners to engage in invest-ments to change information systems and performance metrics, as well as to cooperate in sharing risks, building trust, and positing mutual benefits, are difficult initiatives to achieve. The result can be an escalation in supply chain complexity and decline in process visibility resulting in possible disruptions due to inefficiencies stemming from elongated transportation distances, gov-ernmental restrictions, and other factors driven by the vagaries at the heart of time and space.
Products and Services.
◾ Of all the risks before a supply chain, the twin prob-lems of excess inventory and inventory shortage are perhaps the most damag-ing. Production lines can be halted, transportation schedules disrupted, and customers left unsatisfied. On the other hand, elongated global supply chains threaten to increase warehousing and transportation costs at a time when the marketplace is pressuring for lower prices. Even the burgeoning density of information content in our products and services, which requires an ever-growing information storage capacity and knowledge management capabil-ity, directly contributes to supply channel risk [14].
While there is little doubt that the application of lean to the supply chain has reduced overall costs and diminished the sting of the bullwhip effect, it has also left companies with little margin for error and susceptible to serious disruption arising from even minor disruption. Furthermore, a focus on sole sourcing and outsourcing
has increased dependencies on a single supplier. Such dependency reduces the abil-ity of supply chains to respond effectively to change and makes them insensitive and rigid in the face of a global business environment increasingly dominated by volatility in tastes and fashion.
As the probability of risk accelerates, the need for supply chain contingency planning has moved from an optional to a required strategy and a wealth of litera-ture (as well as college courses!) has arisen to address the issue. Possible solutions run the gamut of pragmatic approaches that deploy modeling and systems analysis to provide outcomes that are measurable and analytical rather than subjective [15]
to other approaches that divide supply chain risk into three areas (strategic, opera-tional, and event-driven) so that the impact of risk can be assessed from overall enterprise, medium-range business operations, and short-term daily transactional levels. Regardless of the method, the goal is to implement initiatives to enable supply chains to be more resilient and efficient by identifying and profiling risk variables, quantifying risk for business decision-making, and enabling technology solutions so they can adjust their supply chains intelligently to today’s changing economic and market conditions.