Supply Chain Risk 1

Factors for Successfully Managing Supply Chain Risks, Part 1: Corporate Strategy

Supply chain risks that ultimately cause supply chain disruptions cost high-growth technology companies millions annually and even worse a large disruption event can cause smaller firms to cease operations. We conducted a study to better understand supply chain risks which focused on the structure, implementation, and maintenance of a formal system for managing risks in the supply chain. A common theme is that the decision to manage supply chain risks constitutes a major undertaking for most firms. Such an undertaking, it is argued, does not take place in a vacuum. Rather, it is a response to a number of factors or influences. However, no research to date has empirically identified these factors and explained how they can be leveraged into a competitive advantage. In our study, we used data from several firms and SCM managers to identify which factors affect the decision to develop a system for managing supply chain risks and we also explain how these factors can influence the level of success.

Study Summary

Certain factors were identified as having a critical impact on predisposition and progress toward managing risks in SCM. These factors included: 1) Corporate Strategy, 2) Supply Chain Organization, 3) Process Management, 4) Performance Metrics, and 5) Information & Technology. These factors describe a situation where our study respondents saw managing risks as an extension of their SCM movement. There seems to be recognition that succeeding requires more than simply creating a new program or department. It is argued that these various factors act to pre-condition the firm and its systems to the introduction, acceptance, and progress on managing SCM risks. The following provides an evaluation of the factors underlying the decision to develop a system for managing supply chain risks and how these factors can be leveraged into a competitive advantage.

Factor 1:

Corporate Strategy

Firms overwhelmingly agreed there is no obvious single application for managing supply chain risks on the market. Most firms (61%) are only using existing SCM applications for managing risk. In the absence of risk management applications, these firms are building risk considerations into traditional SCM applications (e.g., spend, contract, & inventory management, demand planning, benchmarking, building long-term partnerships, etc). An additional 6% said they would like to implement a SCM risk application in 1-2 years, and another 13% said they are considering it. This indicates that while specific supply chain risk applications do not exist, interest levels are very high (80%). The 80/20 rule resurfaces as 80% of the firms have placed a priority on managing supply chain risks. The following questions were also asked on 1 to 7 scale (strongly disagree to strongly agree): 1) Managing supply chain risk is an increasingly important initiative for our operations; and 2) Without a systematic analysis technique to assess risk, much can go wrong in a supply chain. The means for both questions were well above 5.00 and had very small amounts of variance. Again, interest and need levels for supply chain risk applications remains high.

18% of the firms said they will spend over $1M in services, technology, and personnel to support managing supply chain risks, while 7% actually plan on spending over $5M. Another 52% said they plan on spending more modest amounts of less than $500,000. 30% would not answer the question because of its proprietary nature, but indicated a moderately large amount of spend was planned. Not surprisingly, larger companies will invest more than smaller ones. The manufacturing firms look very similar in their higher spending efforts with a focus on supplier failure, whereas the non-manufacturing firms indicate lower spending levels with a focus on logistics failures.

These questions were also asked on 1 to 7 scale (strongly disagree to strongly agree): 1) Our spending intentions for managing supply chain risks are very high (mean=3.37, var.=2.47); and 2) We do plan on investing nontrivial amounts in managing supply chain risks (mean=4.30, var.=3.77). In this study, there was dedicated funding for managing supply chain risks and 86% indicated that such budgets will increase or stay the same. However, only 42% will come from specific SCM departmental budgets and 60% indicated that SCM takes ownership of such investments. While spending intentions for managing supply chain risks are moderate, funding is poorly targeted and ownership is not centered within the SCM discipline. Managing risks is just now reaching the core of traditional and mature SCM applications.

A common theme identified from the cases was that while there were few examples of best practice, there were valuable lessons to be learned from the way individual companies managed risks. It was agreed that the management of risk should be a core issue in the planning of any organization. Firms have increased their exposure to risk through their SCM initiatives which focus on cost reduction. Few firms in this study made a formal assessment of supply chain risks or had a strategy in place. These findings indicate the importance of dedicated resources and aligning risk management with corporate strategy.

This study recommends having an organizational strategy fully committed to undertaking risk assessments in the supply chain and at the very least the need for business continuity planning when the company is exposed to the supply chain. As a part of organizational strategy, it would behoove these firms to build a valued and respected risk management function. Progressive organizations will implement a risk management strategy to enable them to react to potential issues in a streamlined fashion. By having a plan, organizations are able to minimize a large ripple effect in other operations within their organization and across their supply chain.

We hope this research study helps shed light into the Factors for Successfully Managing Supply Chain Risks. We will be diving into our Factor 2 Supply Chain Organization study results next month.