Supply Chains: The challenges are greater as hard-pressed companies adopt leaner models – all the more reason to have a robust framework to manage these challenges.

A joined-up approach to supply chains

Economic stress and lean manufacturing may be making firms more efficient, but they are also stretching supply chains. Hugh Leighton of Aon Risk Solutions says these challenges can nonetheless be successfully managed.

An organisation’s business success depends on reliable and continued supply of products and services by a range of business partners. Understanding and managing risk in an organisation’s supply chain, in today’s fast moving global environment, is an important challenge. The devastating disasters of 2011 and the ongoing drought and wildfires affecting the globe have a severe effect on the supply of goods. Recent natural disasters, particularly during 2011, large scale product recalls and pandemic scares provide real evidence of the impact that supply chain disruptions can have. The scale, duration and complexity of the disruption, including the claims arising from these incidents, took many organisations by surprise. As a result, supply chain disruption is increasingly of concern to organisations, both large and small.

Current risk management knowledge and solutions in this area are rather fragmented, typically focusing on individual risk management options (insurance, contracts, active mitigation etc) and specific types of risks or impacts of disruption (business interruption, reputation/brand erosion etc). Different risk management disciplines have also approached the issue of supply chain disruption using different terminology, methods and objectives. Although, all of these aimed to contribute to building supply chain resilience and ensuring continuity, they show some gaps (e.g. the range of supply chain insurance solutions is limited and presents some limitations). Supply chains are having to work harder and are being stretched by the increasing demands placed upon them.

A survey of 500 organisations by the Business Continuity Institute Supply Chain Resilience Survey 2011 confirmed that supply chain disruptions are on the increase.

• 85% of respondents experienced at least one disruption.
• 40% of disruptions originated below the immediate tier one supplier.
• For those with weaker supply chains, the number experiencing higher financial costs almost doubled to 32%.
• Only 8% of respondents could confirm that all key suppliers had Business Continuity programmes in place to deal with disruption.

Some risks are not ordinarily insurable. A good example would be inclement weather, hindering transport and logistics capabilities of a company (as shown by the ash cloud events that brought Europe to a halt). Similarly, reputational risks are not insured, which means that one of the most valuable assets of many companies is exposed. It is essential to identify and assess the business dependencies on key assets, including tangible products and facilities and intangible ones, such as brand and intellectual property. Having a common framework for managing supply chain risks ensures that supply chain management decisions are taken with due consideration for their risk implications.

Unfortunately as economies contract or competition increases, lean manufacturing often becomes the name of the game, either through just-in-time inventory management or through moving to single suppliers in order generate economies of scale. Such an approach might be highly efficient when things are running smoothly but in the event of a major disruption, it can lead to significant delays in key materials and inputs, or in a worst case scenario to a systemic failure in the supply chain.

But there is an upside for those firms who have invested in rigorous business continuity planning. They will have examined alternative ways of providing their product or service and will come out the other side of a lengthy disruption in a better position than those who haven’t. Similarly, companies in competition to those most adversely affected, that have planned for ways to cope with significant and sudden increases in demand will tend to flourish.

There is a significant need, therefore, for a more holistic approach that integrates different approaches and perspectives on risk and enables organisations to make confident and well-informed decisions regarding their supply chains (e.g. supplier base consolidation or cost reduction). Moreover, there is a need for an approach that establishes a clear link between supply chain risk and a company’s overall risk profile, enterprise risk management framework, business continuity management arrangements and insurance programme. This approach must be flexible, address the specificities of an organisation’s supply chain, but make efficient use of an organisation’s resources and effort.

Successful management of supply chain risks requires the combination of insurance and other risk management solutions. It is essential that when assessing supply chain risks, organisations consider the following: 

• Assess the risks associated with cost-saving initiatives;
• Gain visibility of potential vulnerabilities in the supply chain;
• Make informed decisions on the trade-off between the risk and reward of cost-saving initiatives;
• Manage critical risk exposure cost-effectively;
• Monitor the supply chain for early warning of business disruption events;
• Develop continuity plans to ensure continuity of cash flow and material in the event of a disruption;
• Create accountability and ownership of risk within the organization.

The disruption and uncertainty caused by natural disasters last year has ensured that the risks associated with supply chain management must be continually monitored and re-assessed.

Hugh Leighton, MBCI ACII is Senior Consultant at AON Risk Solutions, Enterprise Risk Management