Risk Management Needed to Strengthen Fragile Global Supply Chains

“Supply chains keep making headlines around the world for the wrong reasons,” insists Boris Felgendreher (@FelgenTweets), Senior Marketing Director for EMEA at GT Nexus,[1] He offers a few examples of supply chain failures and then asks, “Are global supply chains becoming more fragile and if so, why?” In answer to his first question — are supply chains becoming more fragile — he believes they are. As to the “why,” he believes that extended global supply chains contain “inherent imbalances” resulting from the widespread transformation from a “single company” model (vertical industries) to an “ecosystem” model (horizontal supply chain partners). He explains that manufacturing “is no longer the job of a single enterprise. It’s the job of a complex ecosystem of supply chain partners. … Any manufacturer of a complex product such as a car, hi-tech consumer electronics or even clothing relies upon its ecosystem of suppliers far more than the manufacturer may realize.” As supply chain fragility increases, the importance of risk management also rises. Below are a few of the reasons companies should make supply chain risk management a priority. Felgendreher may well be correct in his assessment of the situation. But changing business models aren’t the only factors contributing to greater risk.

Political Risks

Lucy Dixon reports, “The risk in global supply chains is on the rise, according to the Chartered Institute of Procurement & Supply (CIPS) Risk Index. The figure is the highest since 2013 and has been driven by increases in supply chain risk in Western and Central Europe, Eastern Europe, the Middle East, Latin America and Sub-Saharan Africa.”[2] A lot of that increased risk has been created by political activity in some unexpected areas. For example, Dixon writes, “The uncertainty around the post-Brexit relationship between the UK and the European Union has had a negative impact on trade and business sentiment in the UK and across the region.” The election of Donald Trump in the U.S. and his political promise to dismantle trade agreements has also raised uncertainty and concern. Those are not isolated cases. Dixon reports, “Elections over the next 12 months are expected to see gains for populist parties with France’s National Front, Italy’s Five Star Movement, the Freedom Party in the Netherlands and the German Alternative for Germany all sceptical of European integration and hostile towards free trade.” Business leaders have taken notice of these events. A survey completed by Sword Active Risk “shows a dramatic increase in political risk, emanating from the outcomes of the UK Brexit vote and the US Presidential election.”[3] Keith Ricketts, Vice President of Marketing at Sword Active Risk commented, “This is a stark reminder that unexpected events beyond the control of companies can come out of the blue and have a dramatic impact.”

Supply Chain Disruptions

risk-management-01Supply chain disruptions are the central focus of most risk management processes. The more extended a supply chain becomes the more exposure it has to natural and man-made disasters that could cause disruptions. Scott Robinson, a social collaboration consultant, notes, “Disruption is a fact of life in the supply chain. No matter how large or small the chain is, no matter how simple or complex, breakdowns happen. … Disruptions vary in size and complexity as much as supply chains themselves do. Labor shortages, natural disasters, up-chain stockouts, mechanical failures, strikes and fuel shortages are just a handful of the many causes. Moreover, disruption can occur throughout the supply chain with any partner, making planning all the more complicated.”[4] Steve Rice (@TSC__Steve), Director of Product Management at TAKE Supply Chain, adds, “The world is seeing an annual average of 260 major natural disasters with an average annual economic loss of $211 billion, according to the Global Climate Catastrophe Report.”[5]

Proactive Risk Management

Reacting to supply chain disruptions is no longer a viable alternative for companies with global supply chains. They must be proactive and take a holistic approach to risk management. Felgendreher asserts, “Companies will soon no longer compete company against company but ecosystem against ecosystem. As a result, in order to mitigate the vulnerabilities of their global supply chains, companies need to embrace a supply chain ecosystem view.” In order to do that, a company must have end-to-end supply chain visibility. That is no easy task. Numerous pundits lament the fact that in the Information Age many companies still have only a fuzzy picture of their supply chain. It’s not that they don’t want better visibility; achieving it requires collaboration and data sharing among all stakeholders — and not all stakeholders are willing (or able) to collaborate and share. The best risk management processes will attempt to account for all of the numerous variables that can impact a supply chain. To accomplish that feat, companies need a system that can gather, integrate, and analyze both structured and unstructured data. They need a cognitive computing platform. Cognitive computing systems can handle many more variables than older systems and, because they use natural language processing and machine learning, they provide actionable insights readily usable by decision makers.

Even leveraging the insights generated by the best cognitive computing system, there will be surprises. Nevertheless, leading companies will do everything they can to mitigate surprises. Rick Brumett, Vice President of client solutions at Transportation Insight, writes, “To mitigate the risk of less-than-optimal insight, forward-thinking leaders collect real-time data from across all elements of the supply chain and supporting business processes to gain critical insight into what is actually happening inside and outside company walls. Real-time, current-state awareness can uncover barriers to success and vulnerabilities to risk. With advanced analytics and leading-edge technology, market leaders create actionable, interactive business intelligence with customized views of data to develop and quantify continuous improvement strategies.”[5] Felgendreher adds, “There is no way back. Complex systems are already too complex for any single company to master in its entirety. Only organisations that master the switch from single-company focus to ‘ecosystem view’ will survive. This isn’t just semantics. It’s a profound shift in perspective.”

Summary

Judith M. Myerson, a technologist, believes every global enterprise should implement “enterprise risk management (ERM) to proactively detect, prevent and mitigate risks in the supply chain with a focus on deep tier suppliers.”[6] “A risk management plan,” she writes, “consists of four key elements: assets, vulnerabilities, risks and safeguards/remediation.” A plan, however, is only as good as the system that supports it. Enterprise Risk Management is of little value if it only consists of a plan that sits idle on a shelf. A good ERM system is proactive. It gathers and analyzes data around the clock and, when trouble is suspected, it provides decision makers with the longest possible lead time in which to act. Rice explains, “Data from a variety of sources — from enterprise resource planning (ERP) and payment systems to Internet of Things (IoT)-enabled transport trucks — is growing and expanding at an accelerating pace. Access to information from every point in the supply chain provides the critical insights executives, stakeholders and managers need to make real-time decisions on supply chain functions when disaster strikes. By leveraging business intelligence (BI) tools to harness this data and glean insights, businesses can dive into forecasting, planning and transportation logistics that boost performance and prevent — or correct — errors or delays early on before they impact operations.” A cognitive computing system is a great foundation for a world-class Enterprise Risk Management system.

Footnotes
[1] Boris Felgendreher, “Why are global supply chains becoming more fragile?,” Supply Chain Digital, 31 October 2016.
[2] Lucy Dixon, “Global supply chain risk grows,” Supply Chain Digital, 7 November 2016.
[3] Sword Active Risk, “Political Risks to Business Are on the Rise According to 80 Top International Companies,” Business Wire, 16 November 2016.
[4] Scott Robinson, “Three misconceptions about supply chain disruption risks,” TechTarget, 10 November 2016.
[5] Rick Brumett, “How to Navigate the Many Risks in Your Supply Chain,” Material Handling & Logistics, 9 September 2016.
[6] Judith M. Myerson, “Avoid Disaster through Supply Chain Risk Management,” EBN, 9 June 2016.

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