APICS is the premier professional association for supply chain management.

Insurance for Your Business

By Dave Turbide, CFPIM, CIRM, CSCP, CMfgE | January/February 2013 | 23 | 1

APICS magazineThe value of risk prevention—even if you never need it

The longer and the more links in the supply chain—including partners, transportation modes, and handling points—the greater the opportunities for a disruption. Further, if any sources depend on a single resource or geographic area, the effect of a disruption is multiplied. 

These facts are self-evident, but many companies still find it a challenge to identify supply chain risks and develop strategies for dealing with those risks. However, businesses that strive to reduce risks, put in place mitigation strategies, set up recovery plans, and have resources ready to go when needed fare better than companies that haven’t made such arrangements. Perhaps the biggest barrier can be stated as follows: There is no measurable return on risk management investment until or unless a disaster occurs.

Remember the Y2K computer problem? During the buildup to the calendar change from 1999 to 2000, companies spent untold money and resources to repair software, replace systems, and otherwise take positive actions to avoid any issues caused by the two-digit date field found in many applications. Overall, these efforts were successful, and there were no significant problems reported when January 1 arrived. 

It didn’t take long, however, before pundits started questioning the value of that investment. Many experts said there wasn’t really a Y2K problem to begin with. However, there actually was a serious potential risk. It was through considerable effort and investment that the disaster did not cause significant harm to businesses of all sizes, in all industries, all over the world. 

Writing checks you can’t cash
When risk prevention works, the value is in cost avoidance. This is a difficult phenomenon to see and measure. Even with a successful mitigation plan, there still are losses and costs involved; however, they are significantly reduced, which also is difficult to perceive. And, if the disaster never happens, it’s easy to conclude that the effort was wasted. 

Risk managers are challenged to justify their value to the organization and explain the benefits of not having to use the products of their work. It takes recognition at the highest levels of management that risks exist, that there is a cost associated with these risks, and that preparation can mitigate the expense. Executives must be willing to budget for risk management and continue to support risk management efforts even without any clear return—and still be satisfied when the mitigation strategies are not forced to come into play.

Effectively, risk management should be viewed, justified, and funded in the same way as insurance. Companies purchase insurance often because they have to, but also because it’s clear it would be disastrous to go without it. Risk management is exactly the same. 

A significant number of companies that are hit by a serious supply chain disruption go out of business within a few years. Survival rates are greatly enhanced by enacting risk prevention measures, such as multiple sourcing, geographically distributed supply bases, and plans that can speed recovery in the event of a disruption. This is why you must not think of risk management as an investment that may or may not pay off. Rather, think of it as life insurance for your business. And aren’t you happier knowing you’re protected?

Dave Turbide, CFPIM, CIRM, CSCP, CMfgE, is a consultant, writer, educator, and subject matter expert. He has authored six books, published hundreds of articles, and is president of the APICS Granite State chapter. He may be contacted at dave@daveturbide.com.

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