Supply Chain: It's Still 'Risky Business'

By: Douglas Kent, EBN

Supply chains remain a “Risky Business” for many organizations; it’s however definitely not “Mission Impossible”!

There is no doubt that for many reasons, most organizations have an increasingly fragile supply chain that is riddled with potential risk. Over the past few years, we have seen significant events around the world that have only heightened the awareness of how detrimental risk can be to the business. This has caused supply chain risk management to become a paramount focus for many organizations. But the question on the minds of executives today is still: How do we take decisions on which of the possible risks to mitigate?

Within the supply chain, there are many key decisions that could result in significant benefit to the company but could be deemed “risky,” such as outsourcing manufacturing operations for a key product, expanding into a new market, or even the introduction of a new product or technology. Companies often make those decisions based on perceived pricing or service advantages with little thought given to the increased levels of risk.

Most organizations would certainly struggle to quantify those risks to aid them in making solid, fact-based return-on-investment (ROI) decisions on the mitigation efforts to reduce the probability of risk or lessen the impact to the business should the risk be realized. Having a disaster recovery program or putting in place a high-level business continuity plan is simply not enough and seldom touches the risks stemming from risks that aren’t geopolitical in nature.

How would a disaster recovery program aid in the resolution of a key supplier suffering from insufficient capital to fund an unanticipated growth in demand, for example? A robust process for calculating risk is helpful in moving the organization from simply addressing response capabilities to better assessing where in the supply chain we are most vulnerable. This process starts from a solid mapping of the current supply chain and identifying the potential risks. The application of the value-at-risk (VAR) measurement helps us assign a quantifiable number for the risk by the simple calculation: Probability x Impact = VAR.

An understanding of the VAR will drive us to consider the ROI of any mitigation effort to either reduce the probability of the risk occurring (prevention) or the impact that the risk might have to our business (recovery). This powerful combination will help to set an organization on the right path to de-risking its overall supply chain.


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