(12/03/2014) eSourcing Wiki-Wednesday: Supply Risk Management: Major Risks and Mitigation Strategies
Major Risks and Mitigation Strategies
This section discusses six major types of risk and the appropriate mitigation strategies and management approaches for each.
This is the risk associated with not choosing the right supply management strategy. What’s right for one business might not be right for another. For example, a small family-run business may opt to source locally because they do not have the resources needed to manage a global supply base.
The mitigation approach is to define the right strategy up front, possibly with assistance from external consultants and experts, identify and qualify the right suppliers for the business, and use reliable market intelligence to drive decisions, possibly supplemented by external sources.
This is the risk associated with brand management, compliance management, financial performance, and market exposure. Remember that when an organization outsources part production or even entire product lines, it is putting itself at the mercy of its suppliers. If they deliver a sub-par product, or fail to deliver completely, it is the organization that will be on the line. The customers will be looking to the organization, not to its suppliers, for an explanation.
The mitigation approach is to pinpoint the product line’s quality standards tolerance, and determine the possible impact of a compromise. Monitor production batches closely to detect early warnings before potential issues wreak havoc with the firm’s brand, ability to meet compliance regulations, and the bottom line.
This is the risk associated with supplier implementation lead-times and production/performance ramp-up. It’s critical that an organization have a good understanding of the suppliers they are working with, what their capacity issues are, and where they could improve before contracting with them. It’s also important that an organization remember that working with a supplier where its business is only a fraction of the supplier’s total revenue means that the organization may not get the level of attention the organization desires.
The mitigation approach is to ramp up new suppliers quickly to gain early visibility into potential risk factors that might hinder production, lead times, or initial performance. Then collaborate with the supplier on resolving these potential risk factors before they become a problem.
This is the risk associated with ongoing supplier quality and financial issues. After a supplier is selected, even if a considerable amount of work went into the qualification process, there’s still considerable risk and a lot of work to be done. Companies can be acquired, go out of business, or shift strategy at any time. Constant vigilance is required.
The mitigation approach is to continuously monitor all organizational suppliers to avoid disruptions caused by bankruptcies, performance issues, ownership changes, labor strikes, geopolitical changes, and other unpredictable occurrences. Don’t be afraid to tap technology to achieve the level of monitoring necessary to insure this risk is mitigated to the full extent it can be.
This is the risk associated with inventory fluctuations and challenges. Note that while some suppliers may jump at the opportunity to take on new challenges, enthusiasm does not imply that they are in the best position to deliver.
The mitigation approach is to watch suppliers carefully for signs they are overwhelmed with new business and take action to shift demand away to other suppliers if this appears to be the case. A supplier’s desire to grow their business should not affect organizational decisions.
At the foundations, supply chains are made of people – people sourcing product, people building product, people shipping product, people selling product, and people taxing product – and people are fallible. A recent article highlighted six types of human risk that one needs to watch out for in order to succeed in his or her risk management efforts:
- assuming disruptions can only occur at normal operating strength
- assuming your company is the only company that can be affected by a disruption
- ignoring the supply risk associated with demand pooling tactics
- ignoring demand risk when choosing supply-continuity tactic
- allowing managers' risk attitudes and timelines to determine strategy
- building short-term resiliency at the cost of long-term vulnerability
The proper mitigations are, of course, awareness, education, and training.
eSourcingWiki is an open content community of strategic sourcing and procurement best practices. This wiki is intended to be a dynamic document that constantly adjusts and transforms to current trends and thought leadership in supply management. IASTA welcomes global contributors to assist in the ongoing documentation and knowledge building that is essential to creating useful information for supply management professionals.