Supply Risk Management I: An Introduction

Supply chain risk can formally be defined as the potential loss resulting from a variation in an expected supply chain outcome. It is the mismatch between supply and demand.

Traditionally, supply chain risk was often the result of inadequate spend visibility, lack of deep supplier and market information, poor inventory management, poor supplier collaboration, and inefficient coordination heightened by a lack of infrastructure, skills, resources, research, and technology as well as language and cultural barriers.

Today, matters are much worse. With today’s focus on efficiency, lean “just in time” inventories, outsourcing, supply base reduction, centralized distribution, more and faster product launches, low cost country sourcing and supply chain globalization in a highly volatile global market place, companies are at greater risk than ever before. When you consider that 10% of active suppliers represent 80% of spend in many of today’s enterprises, and that many companies lack visibility into their supply chains beyond their tier one suppliers, supply risk management is becoming key to ensuring continued operations in a profitable manner.

After all, the effect of a supply chain disruption goes beyond just late shipments, lost production time, and delayed execution times. It can cause stock outs and lost sales, missed customer expectations, quality and safety concerns, project failure, market exposure, and lost credibility. It can increase costs, reduce your bargaining power, and even influence poor supplier selection as you struggle to correct the imbalance. (It can even devastate your stock price. A recent study in the Journal of Production and Operations Management that analyzed the effect of supply chain disruptions on long-run stock price performance over a three year period found that stock returns of companies experiencing significant supply chain disruptions trailed returns of peers by 33% to 40%.)

The importance of supply chain risk management cannot be ignored. According to Aberdeen’s recent study on Supply Risk Management (October 2005), more than 80% of supply managers at 180 global enterprises reported that their companies experienced supply disruptions within the past 24 months. Supply glitches negatively impacted their companies’ customer relations, earnings, time-to-market cycles, sales, and overall brand perception. Furthermore, it found that more than 75% of companies expect supply risks to increase over the next three years.

However, enterprises that have adopted comprehensive supply risk assessment and management programs, which include leveraging deep supplier and market information, have reduced the frequency of supply risks and outperformed their peers in supply performance and costs.

Tomorrow we will discuss the various types of supply chain risks, which extend well beyond simple supply disruptions, the need for resilience in your daily operations, and the classic strategies for dealing with such risks. Sunday we will conclude with a discussion of some modern methodologies for building resilience into your supply chain, risk management programs, and associated processes.

For more information on supply risk management, see the Supply Risk Management: Mitigate Risks and Reap Rewards wiki-paper over on the e-Sourcing Wiki.

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