Why risk is really an opportunity
The traditional view of risk management in procurement is one of mitigation, minimisation and opportunity cost. It is about contingency planning and ‘just in case’ thinking. Few companies look to risk management as a way to steal a march on their competition, but when a medium to long-term view of the inbound supply chain is taken, this is entirely possible.
In today’s complex global supply chains, business risk is everywhere. Long transit times from low-cost countries are coupled with ‘just in time’ planning, allowing little scope for slippage. Manufacturing sites are rationalised to as small a number as possible to reduce cost and drive economies of scale. Supplier numbers are reduced to minimise management effort and leverage buying power. Against a background of global brand requirements, currency fluctuations and commodity price volatility, as well as political instability and environmental issues, a lot can go wrong very quickly if the right steps aren’t taken.
A typical example was experienced by BMW. Three BMW factories in Germany were closed by the eruption of Eyjafjallajokull volcano in 2010 as vital electronic parts were not delivered. The stoppages meant that 7,000 fewer vehicles than planned were made during the three-day stoppage.
Many businesses look at supply chain risk, but the focus tends to be limited to their immediate suppliers’ financial viability and ability to deal with local catastrophic events. This is missing an opportunity as effective risk management is based on already identified options for a wide range of potential problems, from logistics issues to commodity shortages and demand spikes to second-tier supplier problems.
Taking a comprehensive view of inbound supply chain risk means taking a longer-term view, accepting that ‘bad’ things will happen, and making sure your business is in a better position than competitors when it does. Typical benefits include more robust supply chains, improved service levels, better product launches and reduced focus on non-value adding crisis resolution. It is well worth taking a few hours to take a few steps back and consider how well your inbound supply chain is equipped to deal with the unexpected.
☛ Tom Woodham is a director at consultancy Crimson & Co
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Taking risks means taking chance of either success or failure. Chance is 50/50 unless it is loaded. In the purchasing and supply context, ample vs limited supply or advanced vs delayed delivery might well explain this tautology.
I would never risk missing out on the wisdom of Felix CHAN.
Wise words, indeed, Jason.
Hence in the wise leader’s plans, considerations of advantage and of disadvantage will be blended together
You’re speaking my language, No1.
If I think too seriously about rationalising supply base, I do have a self debate. Yes, rationalising supply base depends on the nature of the purchase being made whether critical or no-critical. But whether critical or or not, I think it’s imperative to have a good number of suppliers & not rationalising to to three or four suppliers as that can be hazardeous to the organisation. Iam not trying to run away from taking risk, but simply being cautious so as to avoid the catastrophy befalling an organisation. Maybe I miss proper comprehension about rationalising and if that’s the case, kindly enlighten me or shed more light to enable me get the sense.
Stay Blessed