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