WHY SUPPLY CHAIN RISK SHOULD BE ON YOUR CORPORATE AGENDA
Over the past decades the world has experienced several major natural and manmade disasters. Events such as the 2010 Eyjafjallajökull eruptions in Iceland and the 2011 Tōhoku earthquake and resulting tsunami in Japan have a profound impact on companies operating in the same country or even on the other side of the world.
The increased complexity and global nature of modern supply chains has the direct effect of reducing visibility of suppliers across the supply chain. Few organisations are aware of the full risks that second and third tier suppliers pose (Jüttner, 2005; Manuj and Mentzer, 2008), whilst a survey by the Business Continuity Institute found that more than 40 per cent of reported supply chain disruptions originate with second- and third-tier suppliers (Business Continuity Institute, 2013).
Supply chains are subject to a wide range of risks on both domestic and international level. Increased complexity of supply chains makes it more difficult to assess the likelihood and impact of disruptions, thereby potentially increasing the risk exposure. In addition to risks resulting from increased supply chain complexity, firms are exposed to operational disruptions due to quality problems, supply variability and capacity constraints. The past decade has also shown an increase in disruptions following natural disasters and terrorist attacks (Sheffi and Rice, 2005).
The direct effect of supply chain risks
Operating in such a connected world with high volatility hampers organisations in fulfilling their primary goal: shareholder value creation. In carrying out its business operations to maximise shareholder wealth a firm is exposed to risks that, once materialised, can have negative operational consequences and cause disruptions. Kleindorfer et al. (2003) exhibited how supply chain disruptions have a significant detrimental impact on both short and long-term operations and
financial performance. Shareholder value decreases by almost 11 per cent by these disruptions (Hendricks and Singhal, 2003) and organisations that experience disruptions, on average, experience a 40 per cent stock price decline (Hendricks and Singhal, 2005).
Implementing the right strategies
Implementation of a business continuity plan, dual sourcing strategy, and close cooperation between supply chain partners are mentioned as the most used actions in order to reduce exposure of the supply chain to potential disruptions or to mitigate the impact (MIT Forum for Supply Chain Innovation, 2013). There is however an inherent struggle with mitigating supply chain risks in today’s globally linked organisational models. The networks of interrelationships that build up a typical supply chain in its entirety hold exposure to risk. Whilst one link in the chain may bear the direct impact of a disruption, the actions of other members in the chain will have consequences for the entire network.
Research suggests that companies with mature and flexible supply chain and risk management capabilities are more resilient (lower impact and faster recovery) to supply chain disruptions. These companies have a clear focus on proactive (ex-ante) SCRM as opposed to only taking a reactive (ex-post) approach. This in turn leads to better operational and financial performance compared to firms with immature SCRM capabilities (MIT Forum for Supply Chain Innovation, 2013).
Overcoming organisational barriers by strengthening the business case
Even though advances are made, supply chain risk management activities still take up organisational resources in terms of managerial time, increased buffer inventory, etc. The major losses incurred by organisations in the aftermaths of events such as the Iceland volcano eruption and the tsunami that hit Japan, have shown that proactive SCRM is still in its infancy with most organisations. Several leaders have however emerged and shown the distinct value of proactive SCRM, thereby increasing the business case for organisations.
Saenz and Revilla (2013) demonstrate the importance of proactive and reactive strategies in dealing with unexpected disruptions through the example of how Cisco Systems, a communication
technology firm, successfully mitigated the impacts of the 2011 tsunami in Japan almost without a loss in profits, whilst the total economic losses are estimated on at least $217 billion. Having developed their risk mitigation strategies after the difficulty in dealing with the Hurricane Katrina’s aftermath, Cisco was able to evaluate the disruption impact for more than 300 suppliers – from tier 1 to raw material providers, listed more than 7,000 affected parts by number, assigned a risk rating to each part and charted a mitigation response within 12 hours.
Case studies like this help strengthen the business case for implementing (proactive) SCRM strategies. The apparent lack of proactive SCRM strategies adopted by organisations is an area that requires further research in order to convince business leaders of the importance of SCRM (Simangunsong et al., 2012).
