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Assets, Liabilities, and Risk

By Scott G. Stephenson | May/June 2012 | 22 | 23

APICS magazine | Assets, Liabilities, and RiskUsing smarter logistics to protect the modern supply chain

In the last decade, inventories have become leaner and businesses across many industry sectors more globalized. Executives, supply chain and operations management professionals, and risk managers alike face the daunting task of reevaluating supply chain risk. It is no longer sufficient to view the supply chain as a set of tangible assets and related liabilities to be insured. Rather, the increased exposure across all operations of the organization requires leaders to adopt a holistic risk management program that focuses on efficiency as well as risk to both tangible and intangible assets.

A comprehensive supply chain risk management strategy is a key component to protecting the most valuable assets of any successful business. Effective risk management goes beyond the supply chain to all major operations of the organization—embedding risk awareness into every function, including the C-suite and department managers. Risk management techniques also must be embedded into mission-
critical points along the operational network of the supply chain. Such techniques allow supply chain managers to make better decisions, balancing the competing priorities of cost effectiveness and minimizing exposure to enterprise-wide risk.

In the past, many sourcing decisions were based on risk adjustment. For example, a low-cost vendor—who may be less reliable, but cheaper than a more dependable competitor—is normalized in terms of its true cost to the organization. When taken on an individual basis, such decisions seem to have little impact. But in the aggregate, they may have critical consequences. Through a holistic risk management model, supply chain managers empowered to apply risk metrics will make better choices. By mitigating risk significantly, they will enhance reliability, driving down actual costs.

To that end, the primary goals of an effective supply chain risk management strategy are

  • to recognize and prioritize vital business components
  • to chart the full supply chain, highlighting interdependencies
  • to uncover areas along the supply chain where disruption will lead to failure.

One of the primary concerns among supply chain professionals and risk managers alike is disruption in the supply chain. A breakdown in production and delivery will lead to lost sales, decreased revenue, margin erosion, profit loss, and—perhaps most importantly—damage to the reputation of the business. Effective disruption mitigation requires thorough risk analysis at each origin, intermediary point, and transportation link. This enables professionals to see all areas of potential harm and determine how best to allocate resources to protect against vulnerabilities.

A thorough assessment requires supply chain managers to work closely with partners and corporate compliance professionals to improve collaboration, develop a risk mitigation plan, and establish a contingency protocol across the network. First, it’s important to recognize where the company’s supply network begins. For example, say an organization has a factory in Taiwan, but that factory sources raw materials from vendors in Argentina, India, and the United States. At each of these locations, supply chain managers need to determine who controls the origin points within the chain and whether those locations are secure.

Key questions to ask include:

  • What is your relationship with your supply chain partner?
  • Are the people there familiar with your risk assessment objectives?
  • Are they willing to work with you to identify and mitigate disruptive risks?
  • Can the partner play a role in your contingency plan?
  • Are sufficient security protocols in place at the facility?
  • Is the facility in compliance with all government regulations?
  • Are its products in compliance with environmental health and safety regulations?
  • Are there labor concerns or unrest at the facility?
  • Is the facility financially stable and physically capable of production to required capacity?
  • Is the facility in an area prone to natural disasters or political upheaval?

The vulnerability of intermediate points
Risk assessment doesn’t begin and end at origin points. Supply chain and risk managers also must consider the risks associated with each intermediary and throughput location, as well as the logistics operations that connect them all. Intermediary locations can include distribution centers, warehouses, port terminals, cross-dock operations, container freight stations, trans-load facilities, rail terminals, truck stops, and rest areas. As with suppliers and origin locations, supply chain managers should identify who controls operations at each intermediary point in the supply chain and determine if those relationships require a new level of interaction and collaboration. They also should ask logistics providers for detailed information regarding efforts to lessen the potential for disruptive risks.

Other questions to consider when evaluating a logistics provider include the following:

  • How has the global recession affected the logistics provider’s business?
  • Does the company have a realistic plan to address the changing business environment?
  • Are leaders willing to collaborate and participate in your risk mitigation plan?

Additionally, disruptive risk may vary from one intermediary point to another depending on the nature and location of the operation. If the organization has a major shipping hub based in a country experiencing significant political turmoil, concerns surrounding port security and congestion may necessitate a contingency plan for the area. Volume flexibility is another issue to consider, especially if distribution centers hinder processes as volume increases.

Intermediary points on the supply chain also are vulnerable to one of the oldest and most prevalent disruptive risks—cargo theft. Although precise statistics are difficult to obtain, it’s estimated that cargo theft costs the US economy billions of dollars each year. To help protect against this significant threat, organizations should select logistics providers that incorporate security protocols at their facilities such as on-site guard personnel, alarm systems, infrared surveillance equipment, and advanced-access control systems. Additionally, organizations should invest in logistics providers and trucking companies that commit to best practices in security. These companies

  • run annual background checks on all drivers
  • ensure trucks arrive at facilities for pickup fully fueled
  • require drivers to travel a minimum of 200 miles after accepting a load before stopping
  • insist vehicles are not left unattended or in unsecured locations
  • lock doors and keep windows up when traveling at low speeds
  • deploy their own hardened padlocks to trailer doors to augment the shipper’s security seal
  • mandate that drivers carry vehicle information and identification at all times
  • have drivers contact authorities and the organization’s supply chain manager in the event of a theft.

Developing and maintaining a reliable supply chain is vital to the success of any business, particularly in today’s global business landscape. The aforementioned techniques and applications enable supply chain and risk managers to work together to identify and mitigate the risk of disruption along all points of the supply chain. As sophisticated technologies, including predictive modeling and weather intelligence continue to evolve (see sidebar), organizations that adopt these tools will be well positioned not only to protect their most valuable assets, but also to gain—and maintain—competitive advantage.

Scott G. Stephenson is president and chief operating officer of Verisk Analytics, which provides risk information from diverse industries including insurance, health care, mortgage, government, and supply chain and operations management.

What can predictive analytics do?
Analytics and business intelligence software have been used in supply chain and operations management for some time. Traditionally, these tools examined relatively stagnant data sources, such as where materials were obtained or trends in customer demand. But the advent of more sophisticated technologies and computing power is transforming the industry. Forward-thinking organizations now are leveraging modern predictive analytics tools and moving beyond conventional reporting to recognize key trends and patterns all along the supply chain, particularly in the area of supply chain risk management.

Major catastrophes in recent years, such as Hurricane Katrina, flooding in Thailand, and the earthquake and tsunami in Japan, all illustrate the devastating effect disasters can have on today’s global supply chains. One way of protecting against the significant and likely costly effects of such events is employing analytics, including innovative weather intelligence tools, to create a more efficient supply chain while improving customer service. These tools enable supply chain executives to anticipate changes to supply and demand and take appropriate actions in advance, such as rerouting shipments and ensuring product availability.

Analytics can be used to alert supply chain and operations management professionals to major issues across the supply chain. Through predictive algorithms, an alert can be sent if significant changes occur at a supplier, such as dwindling material, for example. Further, analytics can be leveraged to measure supply chain efficiency and performance against industry benchmarks, including lean six sigma and the Supply Chain Council’s SCOR model.

Cargo theft often is perpetrated by groups that tend to operate in the same general areas, such as certain roads and truck stops. Predictive analytics can help companies plan safe routes for the transport of goods from origin to destination by applying predictive models to historical cargo theft data to keep goods and drivers secure.

Analytics tools also can help manage environmental health and safety (EH&S) regulatory compliance across supply chains and product life cycles. When a company incorporates disparate sources of EH&S data throughout its business units, it can prevent a comprehensive view of trends. Analytics can bring about a heightened focus on EH&S compliance and sustainability. For example, EH&S analytics tools can offer visibility into product inventories within the enterprise, as well as at upstream suppliers and downstream partners. The resulting business intelligence enables EH&S professionals to more effectively manage the full spectrum of product stewardship and workplace safety regulatory requirements.