Managing Supply Chain Risk is Good Business, but 60 percent of companies pay only marginal attention to risk reduction
Global organizations are exposed supply chain risk ranging from controllable risks — such as raw material price fluctuations, currency fluctuation, market changes and fuel price volatility — to uncontrollable ones, such as natural disasters. The decisions these organizations make in managing these risks can have long-term impact on operational performance.
The MIT Forum for Supply Chain Innovation recently released a report in collaboration with PwC on this topic. The survey asked participants their views on how key supply chain complexity drivers have evolved over the past three years: 95 percent of respondents stated that dependencies between supply chain entities have increased; 94 percent stated that changes in the extended supply chain network configuration occur more frequently; and 94 percent stated that new product introduction has been more frequent.
In the past twelve months, more than 60% of the companies surveyed said that their performance indicators had dropped by 3% or more as a result of supply chain disruptions. Alignment between partners in the supply chain is the most important factor in mitigating risk.
According to the survey results, as many as 60 percent of the companies pay only marginal attention to risk reduction processes. These companies are categorized as having immature risk processes. They mitigate risk by either increasing capacity or strategically positioning additional inventory.
The remaining 40 percent do invest in developing advanced risk reduction capabilities and are classified as having mature processes. The data showed that companies with mature risk processes perform better both operationally and financially. Managing supply chain risk is good for all parts of the business — product design, development, operations and sales — the data indicates.
The top 10 actions companies take to mitigate risk are:
1) Create and implement a business continuity plan
2) Implement dual sourcing strategy
3) Use both regional and global strategy
4) Pursue (1st and 2nd tier) supplier collaboration
5) Pursue demand collaboration with customers
6) Apply forward buying/hedging strategy
7) Increase inventory levels and safety stock
8) Establish distribution centers in multiple regions
9) Pursue near-shoring manufacturing strategy
10) Use component substitution strategy
MIT professor David Simchi-Levi, founder of the MIT Forum, says, “Our survey indicates that supply chain disruptions have a significant impact on company business and financial performance, and companies that invest in supply chain flexibility are more resilient to disruption than mature companies that don’t.
“Flexibility is critical to a company’s ability to adapt to change,” he adds. “A greater degree of flexibility in their businesses will allow companies to better respond to demand changes, labor strikes, technology changes, currency volatility, volatile energy and oil prices.”
“As companies expand into the global marketplace, they need to adjust their supply chain strategies to meet the increasingly complex requirements of their customers and manage multiple distribution channels,” says Glen Goldbach, PwC’s supply chain director. “To help companies along the path to supply chain resilience, we propose a unique framework in this study that assesses a company’s maturity and recommends strategies to strengthen their capabilities. This is unique in the market.”
The findings validate five key principles that companies can use to better manage risks to their supply chains and prepare for future opportunities.
1) Supply chain disruptions have significant impact on company business and financial performance.
2) Companies with mature supply chain and risk management capabilities are more resilient to supply chain disruptions. They are impacted less and they recover faster than companies with immature capabilities.
3) Mature companies that invest in supply chain flexibility are more resilient to disruptions than mature companies that don’t.
4) Mature companies investing in risk segmentation are more resilient to disruptions than mature companies that do not invest in risk segmentation.
5) Companies with mature capabilities in supply chain and risk management do better along all surveyed dimensions of operational and financial performance than immature companies.
A total of 209 companies with global operations completed the survey.
Click here to view the the full report, “Supply Chain and Risk Management: Making the right decisions to strengthen operations performance.”
