The simple fact is that in today’s longer global supply chains, product moves over greater distances and across more multinational borders than in the more localized supply chains of the past. This distance-based supply chain, whose links are forged by many supplier tiers in various countries, carries a risk dependent on its length and diversity. The longer and more diverse it becomes, the more it is susceptible to unforeseen circumstances.

1. CHECKPOINT
Mitigating Supply Chain Risk in Uncertain
Times—Murphy’s Law
BY THOMAS L. TANEL
The simple fact is that in
today’s longer global supply
chains, product moves over
greater distances and across
more multinational borders
than in the more localized
supply chains of the past. This
distance-based supply chain,
whose links are forged by
many supplier tiers in various
countries, carries a risk
dependent on its length and
diversity. The longer and
more diverse it becomes, the
more it is susceptible to
unforeseen circumstances. By consequence, the supply chain is rendered delicate, extended, and bloated
in some way.
Are you equipped to succeed in a supply chain
world of increasing difficulty and insecurity and
multiple interconnected supply chains? Do you have
the correct response to a supply disruption in the
supply chain and the attendant supply-related risk?
Supply chain disruption can destroy
shareholder value and corporate profitability. More importantly, taken
together, total supply chain costs consume about 7 to
12% of corporate annual revenue across all industries, which makes the task even more daunting.
IMPACT ON
GROWTH
In their 2005 study of the
financial effect of supply
chain disruptions, Kevin
Hendricks, formerly of the
University
of
Western
Ontario, and Vinod Singhal,
of the Georgia Institute of
Technology, made some interesting findings. They discovered that the average effect of
supply chain disruptions in
the year leading to the disruption included a 107% drop in
operating income, 7% lower
sales growth and 11% growth
in cost. Share price volatility in the year after the
disruption was 13.5% higher than in the year before
disruption. Don’t you think that BP can attest to
this effect as a result of the Gulf Coast oil spill in
the USA?
Risk is an everyday occurrence in business, and
companies either consciously or unconsciously include
it in their decision-making process when managing
their operations. (See sidebar: Most Common Supply
Chain Risks.)
Companies must invest in enhancing the integrity
of their supply chains, in a manner that balances
operational objectives with reputation risks (a type
of risk related to the trustworthiness of business).
Supply chain risk exists in many varied forms. For
MOST COMMON SUPPLY CHAIN RISKS
• Financial instability, bankruptcy, or financial failure of
a supplier
• Fire, chemical spill, etc. at the
supplier firm
• Problems in electronically sharing information with suppliers
• Suppliers incorrectly interpreting our requirements
• Natural disasters affecting
suppliers’ operations
• Political instability, terrorism,
civil strife, or war affecting
suppliers’ operations
• Reduced accuracy of forecasts
and plans
• Long physical distances
between buyer and suppliers
• Inability to influence /manage
suppliers
• Lack of alternative sources of
supply
• Labor availability, slowdowns,
strikes, and quality of workforce
• Health issues, disease, quarantines, and pandemics
Source: CATTAN Services Group, Inc. Research
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2. CHECKPOINT
instance, damage to a firm's reputation can
Figure 1: Levels of Likelihood Criteria Dimension Example
result in lost revenue or destruction of shareholder value. Damage to revenue may be perDescriptor
Probability
Rank
Value
petrated by transportation disruptions, natural
Highly Probable
>75%
High
5
disasters, strikes, and political unrest—all of
which may interrupt supply of product to the
Probable
>50% — <75%
Medium High
4
ultimate customer or components to the facOccasional
>25% — <50%
Medium
3
tory. By way of example, the European debt criRemote
>10% — <25%
Medium Low
2
sis, the Japanese earthquake and tsunami, and
the Arab Spring uprisings all had a ripple effect
Improbable
<10%
Low
1
in 2011.
As PPB Newslink reported in March 2011,
more than 40% of the world’s USB flash drive
supply is produced in Japan. In fact, one major sup- organizations pay, on average, an additional 4% to
plier, Toshiba, supplies 30% of the world’s resolve a supply incident stemming from supplier finanmemory chips alone. When the tragedy unfolded in cial distress. What specifically accounts for that 4% cost
Japan due to the history-making earthquake and increase? According to the PSC research, the real cost of
tsunami, memory prices jumped by 50 to 60% poor supplier risk management includes: supplier product line or facility closures; reduction in quality stanovernight–literally.
dards, and supplier layoffs and bankruptcies.
Recently, as a hedge against rising oil prices, Delta
SUPPLY BASE A major concern for purchasing
STABILITY
and supply chain executives is Airlines bought the Phillips 66 refinery in Trainer,
supplier financial stability as the sup- Pennsylvania, to maximize its jet fuel production
ply base shakeout occurs from the last four years’ capacity. As reported by USA Today, “Fuel makes up
worldwide financial reckoning. According to between 25% and 40% of an airline's costs, and soarPricewaterhouseCoopers LLP, many companies are ing prices in the past several months have dug into
beginning to learn that relationships with critical industry profits and led to higher fares for the flying
suppliers shouldn’t be taken for granted. public. The Pennsylvania refinery and products it
Relationships must be acknowledged, protected, and produces will fulfill 80% of Delta's fuel needs in the
nurtured to positively impact a company’s bottom U.S,” the publication said.
Clearly, understanding and mitigating supply
line.
chain risk needs to be recognized by the C-level of
As a case in point, the effects from the March 2011
earthquake and tsunami, and the ongoing nuclear management. For example, what does this do to our
crisis in Japan: Automotive News reported that supply supply risk and the increased supplier risk dependchain management at Honda was being stress tested, ency? How do we assure ourselves of supplier viabilgiven that at least 113 of its suppliers are located in
the affected areas.
Closely monitoring the financial health of suppliers has become an important part of the job for anyone involved in a company’s purchasing or procurement sourcing efforts. A solvent supplier yesterday
may become an insolvent supplier today. While supplier insolvency is a known risk, the recent economic
downturn has brought it to the forefront. To weather
this and future storms, organizations must focus on a
proactive approach to better anticipate changes in
supplier viability and financial health.
According to a recent research project by the
Procurement Strategy Council (PSC), procurement
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Figure 2: Severity of Impact Criteria
Dimension Example
Descriptor
Rank
Value
Catastrophic
High
5
Critical
Medium High
4
Serious
Medium
3
Marginal
Medium Low
2
Negligible
Low
1
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3. CHECKPOINT
ity and financial health in light of
these trends?
Having assessed
the risks and
LIKELIHOOD
identified those
Highly
that require action, plans need to be
Probable
drawn up and responsibilities
Probable
assigned to control and mitigate
these risks. This means risk identifiOccasional
cation, risk assessment, and risk
mitigation. The intent of risk mitiRemote
gation planning is to answer the
question, “What is our approach for
addressing this potential unfavorImprobable
able consequence?”
ᔢ Avoiding risk by eliminating
the root cause and/or consequence
ᔢ Controlling the cause or consequence
ᔢ Transferring the risk, and/or
ᔢ Assuming the level of risk and continuing on
the Supply Chain Continuity Plan
The allocation of risk should be dependent on the
assessment of the likelihood and consequence of the
risk and then the identification of who is best able to
control or manage the risk. Normally a risk template
has two critical elements:
1. Likelihood of occurrence (probability)—A risk
is an event that "may" occur. The probability of it
occurring can range anywhere from just above 0%
to just below 100%.
2. Severity of impact or consequence (magnitude)—A risk, by its very nature, always has a negative impact. However, the severity or size of the
impact varies in terms of cost and impact on some
critical factor.
So let’s look at the Levels of Likelihood Criteria
Dimension Example in Figure 1, which represents
the probability that a risk will occur. It values that
risk’s probability of occurrence on a scale of 1-5 with
5 being the highest-ranked probability and 1 being
the lowest-ranked. The Severity of Impact Criteria
Dimension Example in Figure 2 represents the magnitude of a risk’s impact. On a scale of 1-5, it values
risk’s severity of impact with 5 being the highestranked impact and 1 being the lowest-ranked.
You then use the two dimensions in Figures 1 and
2 to calculate and quantify the risk in Figure 3. This
Risk Analysis Levels of Likelihood and Severity of
PHOTOS: COURTESY OF THOMAS L. TANEL
RISK MITIGATION
PLANNING
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American Management Association
Figure 3: Risk Analysis Levels of Likelihood and Severity
of Impact Scorecard Example
Severity of Impact
NEGLIGIBLE
MARGINAL
2x5=
1x5=
5
10
2x4=
1x4=
4
8
2x3=
1x3=
3
6
2x2=
1x2=
2
4
2x1=
1x1=
1
2
SERIOUS
3x5=
15
3x4=
12
3x3=
9
3x2=
6
3x1=
3
CRITICAL
4x5=
CATASTROPHIC
5x5=
20
4x4=
25
5x4=
16
4x3=
20
5x3=
12
4x2=
15
5x2=
8
4x1=
4
10
5x1=
5
Impact Scorecard Example gives you a quick, clear
risk quantification ranking of the priority that you
need to give to each risk.
Do you remember what BP’s CEO said about the
Gulf of Mexico oil spill? He gave it a likelihood of
occurrence of 1 but a severity of impact of 5. Well, the
company was certainly wrong in their risk assessment!
The Scorecard Example chart in Figure 3 allows
you to rate potential risks on these two dimensions:
(1) the probability that a risk will occur is represented on one axis of the chart and (2) the impact of
the risk, if it occurs, on the other. The higher the
score, the higher the risk.
You can now decide how risk-averse-based you
are. Does your organization have the wherewithal to
implement a robust Supply Chain Risk Management
(SCRM) strategy? If not, do you feel that your organization is flirting with disaster by not exploring and
investing in SCRM measures? Since SCMR is becoming an increasingly visible, multifaceted phenomenon, what are you doing to mitigate it?
As companies look to recover from the uncertainty and economic turbulence of the last four years,
the experience of managing supply chain risk across
oceans and continents is still daunting for many
organizations. Why? They unknowingly have realized
that they have taken on greater exposure to risks and
uncertainty as the supply chain today has been rendered weak and vulnerable. MW
Thomas L. Tanel, C.P.M., CISCM, CCA, CTL, is president
and CEO of CATTAN Services Group, Inc.
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