Managing supply chain risk is a major concern for business owners. With catastrophes like earthquakes and political unrest, and the added complications of overseas supply acquisitions and just-in-time inventory, supply chain risk management is more important now than any time in history.
Physical hazards to the supply chain are a major cause of concern to CEOs, according to a recent survey undertaken by FM Global, a worldwide mutual insurer of property risks. Some of the problems reported by the 169 senior executives were fires, accidents, ships sinking, boiler explosions, and recent physical plant attacks in Mumbai, India. Damage caused by natural disasters caused operational trouble as well, the respondents reported. Hurricanes, flooding, tsunamis, wildfires, earthquakes, strong storms, and tornados were some of the concerns these businesses faced. Damage to critical suppliers’ production also included power outages and other accidental damage.
Global sourcing clearly increases risks, the CEOs believe; however, fully 62% of the respondents predict their organization’s global sourcing will increase over the next three years. If companies are increasing procurement outside the US, how should managers handle their supply chain risk?
Here are a few tips from FM Global and from a few other sources.
- Thoroughly research your supply partners before committing to them. We only need look at recent defective Chinese drywall issues to understand how important our supply chain partners really are to companies’ solvency.
- Insist on sourcing partners with strong risk management practices and business interruption plans. Thirty-eight percent of the respondents felt they lacked control over their partners’ ability to respond to supply chain interruptions.
- Approach supply chain risk in a systemic manner like any other risk management concern. In some cases, you can apply the tools used to evaluate internal risks to supply chain risk. Use standardized practices so that all procurement due diligence is completed with comparable care.
- “Find an appropriate balance for your company between sole-sourcing (which reduces economies of scale) and multi-sourcing (which reduces risk),” one respondent replied in FM’s survey, Physical Risks to the Supply Chain: The View from Finance.
- Diversify suppliers geographically, especially important when natural disasters strike. A current example is the disaster in the Gulf. Louisiana restaurants that sole-sourced seafood locally may be scrambling to find alternative seafood providers on the East Coast in case local seafood become contaminated, which is not the case at this point, National Public Radio reports.
Because supply-chain disruption is one of those risks that is low frequency/high severity, the natural response for many companies may be to ignore the perils. Yet we all can list many examples of these types of disasters: 9/11, Hurricane Katrina, the Northridge earthquake, the LA riots, to name just a few.
Insurance, FM Global recommends, should be a “last resort.” There are many checks and balances a company can implement to strengthen and protect its supply chain, and its reputation. A tainted product or an inability to provide what you promised can irrevocably damage your company’s standing. If you have watched the pained face of BP’s Tony Howard, you know one thing: you never want to be in front of a camera trying desperately to repair your company’s reputation.