By Yoo Jong-ki
Director at Deloitte Anjin
SSupply chain risks are on the rise as is their potential impact on business performance and shareholder value. A recent study found that 85 percent of global supply chains had experienced at least one significant disruption over the preceding 12 months.
Another study found that firms having suffered from a publicly announced supply chain disruption delivered shareholder returns approximately 30 percent lower than their peers. Results like these are too important to ignore and the risks are only increasing.
A variety of internal and external forces are driving the rise in supply chain risk. Some are macro trends such as globalization and global connectivity, which are making supply chains more complex and amplifying the impact of any problems that may arise.
Others stem from the never-ending push to improve efficiency and reduce operating costs. Although trends such as lean manufacturing, just-in-time inventory, reduced product lifecycles, outsourcing, and supplier consolidation have yielded compelling business benefits, they have also introduced new kinds of supply chain risk and reduced the margin for error.
Events that were once considered “black swans” — high impact, but low probability events — now seem to be an almost regular occurrence. This is not necessarily because problems are happening more often, but because in a globally interconnected business environment, problems that used to remain isolated now have far-reaching impacts.
At the same time, customer expectations and product lifecycles continue to shift.
Today’s buyers expect businesses to deliver a continuous stream of products that are better, faster, and cheaper — while acting responsibly toward society and the environment. And thanks to social media and the Internet, if a company has a weak link or one of its supply chain partners stumbles there’s a good chance the public will learn about it even before the CEO does.
All of these trends are challenging traditional notions of “acceptable supply chain risk.”
In this increasingly complex and challenging environment, what can an organization do to manage its risk exposure and protect the value of its business and brand?
Given the scale and scope of today’s global supply chains, there is no way for a company to predict and prepare for every possible risk. However, what a company can do is “to build resilience,” which proactively addresses the critical vulnerabilities in its supply chain that expose the business to risks that exceed its risk tolerance.
Two companies that face similar risks can have dramatically different levels of risk exposure depending on the resilience of their supply chains. A resilient supply chain can help a company sidestep a wide range of risks and, perhaps even more important, to bounce back quickly from risks that cannot be avoided.
A company may not be able to prevent a shipping port from shutting down due to a natural disaster or labor strike, but it can minimize its vulnerabilities by creating a flexible supply chain strategy that includes alternate distribution points and/or modes of transportation — with the ability to shift quickly between various options as needed.
Similarly, although a company can’t guarantee its production equipment will never fail or that demand will never shift above or below expected levels, it can build reasonable levels of flexible manufacturing capacity into its network to support the ability to produce different products in response to problems and changing needs.
Also, while it might not always be possible to avert the bankruptcy of a tier 1 supplier, a company can anticipate the problem and minimize the damage through improving its visibility into supplier financial performance. What’s more, through close collaboration it may be able to work with atrisk suppliers to improve their operations and help them remain viable and competitive in the face of adversity.
Although some level of supply chain risk is unavoidable, robust control mechanisms help ensure a company is doing everything it can to minimize its risk exposure, including comprehensive business continuity plans to prevent or recover from critical disruptions.