The Global Supply Chain Ups the Ante for Risk Management

The Global Supply Chain Ups the
Ante for Risk Management
Insights from a Quantitative Study
08/11/2015
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC

Contents
Research
Disclosure
Executive Summary
What Is Risk Management?
Current State
Why a Risk Management Program?
The Ports as a Risk Issue
Risk Management Fundamental to the Global Organization
Supplier Sensing and Supplier Development Programs
Preventing a Material Event
Recommendations
Conclusion
Appendix
Prior Reports in This Series
About Supply Chain Insights LLC
About Lora Cecere
Endnotes
3
3
4
6
6
8
10
12
13
15
17
18
19
23
24
24
25

Research
As companies become more global, the need for risk management increases. This report takes a
critical look at the current practices of Supply Chain Risk Management. The basis of the report is a
quantitative study completed in July 2015. The study is based on a quantitative survey designed for
and tendered to a research panel. The design is based on insights from a prior survey conducted in
2014. To participate in the study, respondents were screened on company type, company size and
familiarity with risk management practices.
In Figure 1, we share the objectives, methodology, and demographics of the Risk Management study
that is the basis of this report.
Figure 1. Overview of the Risk Management Analysis
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research process. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share and use. Please share this data freely within your
company and across your industry. All we ask for in return is proper attribution when you use the
materials in this report in public forums. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and our citation policy is outlined on the Supply Chain
Insights Website.

Executive Summary
Unfortunately, supply chain disruptions are a fact of life for today’s global multinational company. The
reasons are many. A risk management event can be triggered by natural events, geopolitical shifts,
economic uncertainty and demand/supply volatility.
Historically, the roots and genesis of risk management programs were based on attempts to reduce
insurance costs. Today it is much, much more. The focus is on prevention, early sensing, and the
execution of well-orchestrated plans to mitigate the impact of a disruption. Global supply chain
leaders understand that designing and implementing a robust risk management practice is essential
and fundamental to running a global business. The size of the bubble in Figure 2 indicates the relative
level of risk today, and the colors correspond to the expected change in risk (5 years ago vs. 5 years
in the future).
Figure 2. Comparison of Risk Drivers for the Past Five Years and Future Five Years

While product quality and supply chain visibility are declining but still important, the areas of
operations complexity and the definition of globalization infrastructure is increasing. The areas of
economic uncertainty, supplier reliability, along with demand volatility, are continued risk factors.
Over time, as supply chains morphed from regional to global multinational organizations, globalization
and regulatory compliance increased. As a result, procurement has shifted from traditional programs
focused solely on contract management, price and term negotiations, and supplier scorecards to
include the evolution of supplier development, to manage product quality and multi-tier supplier
relationships, in and across value chain relationships.
Today is a less certain world than a decade ago. Geopolitical shifts, economic uncertainty and
demand/supply volatility are rising. In addition, to spur growth companies are quick to add products to
the item master, but slow to rationalize the portfolio. The rising complexity of items sold decreases the
organization’s ability to forecast, and the longer lead times across multiple tiers of sourcing and
supply increases the Bullwhip Effect’s impact (distortion of the demand signal across multiple tiers of
the value network). As a result, there is a greater need for supplier development and supplier sensing
to reduce supply risk. Inventory management and supplier financial sensing grow in importance with
the increase in uncertainty.
Risk management is no longer narrowly focused: a technology, a response to a natural disaster, or
improving supply chain visibility. Instead, it is more holistic with a focus on managing demand and
supply variability cross-functionally and improving outcomes in an uncertain world.
In this report, we share insights on the current state of risk management programs while providing
recommendations on what defines excellence.

What Is Risk Management?
To ensure clarity, let’s start with a definition. For the purposes of this report, supply chain risk
management is defined as the proactive identification and assessment of potential risks to the supply
chain along with the development of strategies to avoid these risks and avoid supply chain disruption.
A disruption is a failure in cost, quality or customer service. The event can be external or internal to
the enterprise. It also can be material affecting performance to the degree that it must be declared, or
stated, on the financial balance sheet in corporate reporting.
Current State
When business leaders are asked about relative business pain, as seen in Figure 3, risk
management ranks lower than other business drivers. Does this mean it is unimportant?
Figure 3. Top Issues of Business Pain for the Respondent

We think no. Instead, risk management programs are multi-pronged with a focus on mitigating
multiple issues—talent availability, volatility, product quality, and supplier reliability—causing business
pain. Successful risk management programs are focused on the mitigation of these and many other
critical business issues.
The business drivers vary by industry. As shown in Table 1, while talent development and the need to
build global supply chain teams is pervasive across the process, discrete, and retail industry sectors,
the process industries—consumer products, food and beverage, chemical, and pharmaceutical—are
struggling with the speed of business, changing regulations, and the clarity of business strategy. In
contrast, discrete industries are more focused on product quality, supplier reliability, and cross-
functional alignment. Retail, with aging systems and increased security risks for the protection of
customer data, struggles more with the ability to access and use data and the management of value
network relationships. The risk management program differences vary more by industry than by role
(for role-based analysis reference Figure E in the Appendix).
Table 1. Top Issues of Business Pain by Industry sector

Why a Risk Management Program?
As shown in Figure 4, for most, it is just the right thing to do. Based on business impact and the need
for prevention, it is also a focus of the leadership team. It is a horizontal cross-functional process.
Over the last ten years, risk management and corporate social responsibility programs have become
tightly intertwined. This is an increasing trend.
Many times, approximately 47% of the time, risk management importance is driven by a disruption. A
disruption stops the flows of the supply chain. It can be driven by a natural event, or a major quality
issue, but the impact is the same. The supply chain stops functioning. Normal operations come to a
halt. These events scar an organization leaving multi-year impacts.
Figure 4. Reasons for Risk Management Importance
A global organization is more dependent on the reliability of the nodes of the supply chain than a
regional supply chain. The longer trade lanes result in a greater bullwhip effect and a distorted view of
market demand. To compete, companies must constantly change production schedules and logistics
agreements and tenders. The data is ever-changing, necessitating the need for an inter-enterprise
system of record to manage value networks.

The unfortunate reality is that in today’s supply chain most trade is supported by email and
spreadsheets. Traditional connectivity methods of Electronic Data Interchange (EDI) while important
have too much latency to manage the hour-by-hour and cross-time-zone requirements of supply.
Unfortunately, only 8% of flows for quality and inventory are managed through canonical
infrastructure through B2B networks0F
i
. These requirements cannot be managed through extensions of
Enterprise Resource Management (ERP) or Advanced Planning Systems (APS). Instead, it requires
the building of outside-in processes using business networks based on many-to-many data models.
(For more on these requirements reference the related research available from Supply Chain Insights
at the end of this report.)
In addition, multi-tier inventory management, network design, and supply chain visibility increase in
importance. The reliability in the flows of product, cash, and information across borders and
continents is paramount. The trade lanes are longer. In-transit inventory is greater. When things go
wrong the impacts are greater. The impacts are greater than in the times of a simpler, more regionally
controlled supply chain.
In Figure 5, we share the impacts of supply chain events for the period of 2010-2015.
Figure 5. Impacts on Supply Chain Results

Note that supply chains recover better and more quickly from a major disaster like a hurricane,
tsunami, flood or a volcano, than they can from major port disruptions. Supply can usually be sourced
from multiple points and the supply chain, if properly designed, can pivot quickly—alternate supply,
redeployment of inventory, and new shipping lanes—in the face of a natural disaster. In the last
decade, Intel’s supplier development efforts in Japan, and Seagate’s in Thailand, spawned best
practices in supplier sensing and supplier development proving that when sensed early, and
processes are well-developed, that the impact of a natural disaster on the supply chain can be
mitigated.
The ports are a different story. When there is a problem, there are few alternatives. Resolution is
slow and deeply enmeshed in government bureaucracy. When there is a port slowdown, lead-time
variability increases ten-fold1F
ii
. The supply chain can respond better to longer lead times than supply
variability. In a port slowdown, containers sit on the water with little to no predictability for unloading.
The node of the supply chain becomes unreliable, putting pressure on other nodes. The time for
resolution is longer and less manageable.
The Ports as a Risk Issue
Ocean cargo and port infrastructure is a looming issue for the United States. The 2015 port slowdown
is the tip of the iceberg. While the 2015 port slowdown was heralded as a labor issue, the business
drivers were more fundamental. The introduction of larger ships, with a need for greater port capacity
for unloading, was compounded by the transfer of ownership of chassis (the undercarriage of the
container for road transit) from the ocean carriers to the transportation providers in the ports. Port
authorities—especially in land-locked ports—were caught flat-footed. Manufacturers did not know
what to do. For many, due to time and cost, shifting ports was not an option.
As shown in Figure 6, ship size has slowly increased over the last decade. Ships are now three times
greater in size than they were ten years ago. The increase in draught, or depth, of a loaded container
ship impacts logistics flows through major throughways like the Panama and Suez canals.
While manufacturing processes are being redesigned for shorter cycles and smaller batches to
improve reliability, in ocean freight, it is the inverse. Ocean carriers are moving towards longer cycles
and lumpier supply. This requires the redesign of the supply chain for push-pull decoupling points
with greater focus on multi-tier inventory design. Most companies are not up to the challenge.
The larger ships, coupled with slow steaming of ocean vessels to improve fuel efficiency, are
increasing transit time; but, it is also increasing in-transit inventories. This has an impact on working

capital and obsolescence. As a result, when there is a port slowdown, the issues are messier. The
ships are bigger and the risk is higher.
Figure 6. Changes in Ship Size2F
iii
In supply chains with short-life-cycle products like high-tech and electronics, slow steaming of the
ocean vehicles, and an increase in port reliability issues, puts greater volume in the air with an impact
on costs and greenhouse gas emissions.
To stem the issues in North America, there is a need for a port infrastructure redefinition. Unlike
European countries that are quickly redesigning ports for the Triple-E ocean container ships (over
14,000 TEUs), the United States is slow to react. As a result, future port issues will be an even
greater risk issue to the North American supply chain. To combat the issue, large companies are
seeking help from government agencies to put more funding and attention on supply chain
infrastructure. Risk management is shifting from an enterprise to a value chain discussion, including
lobbying efforts by major global multinationals to improve commerce logistics infrastructure.

Risk Management Fundamental to the Global
Organization
Globalization is, and continues to be, a major impetus to program development for risk management.
The building of the global multinational company is a journey. It happens over many, many years.
The systematic risk management programs are typically managed at a leadership level (reporting to a
Chief Operating Officer or Chief Executive Officer 35% of the time) or by the supply chain
organization (43% of the time). It is seldom a reporting relationship managed by the finance team (8%
of respondents). Leadership is a major factor for success. Based on interviews with clients over the
past decade, this is a shift. The early risk management programs were more deeply rooted in finance
or procurement. As they have matured, they have been elevated in the organization and become
more cross-functional. As shown in Figure 7, they are seldom outsourced. It is just too critical.
Figure 7. Structural Definition of Risk Management Programs
A standalone group—managing cross-functional and interrelated business issues as a risk
management program—is directionally more common in discrete organizations than a process-based

industry. Why? Discrete organizations are more dependent on contract manufacturers and
intertwined value-chain relationships between first, second, and third tier manufacturers. With
complex Bill of Materials (BOM) relationships, and large quality of conformance issues with global
suppliers, these brand owners learned the importance of risk management early. Only 6% of
respondents are just getting started and 22% believe that their programs are much better today than
five years ago.
Supplier Sensing and Supplier Development
Programs
To mitigate risk, over the last decade, companies have initiated supplier development programs. As a
part of these cross-functional initiatives to sense the financial health of suppliers, brand owners sense
financial health and deploy teams to help improve the supplier relationship. This program is a
characteristic of a supply chain leader.
While traditional procurement programs are more focused on buy-sell relationships and reducing
supplier costs, supplier development programs are more proactive with a focus on helping improve
supplier health. The leader knows the value chain is dependent on healthy and profitable supplier
relationships.
Figure 8. Supplier Visibility

Supplier development starts with supplier visibility. The majority of customers, as shown in Figure 8,
have visibility of their first tier of suppliers but fewer have visibility of the total supply chain. When a
disaster happens, the first step in deployment of resources is visibility. It becomes mission critical.
The monitoring of supplier health is a characteristic of a mature risk management program definition.
Financial sensing of suppliers grew in importance following the 2007 recession. Leaders today have
advanced financial sensing capabilities for strategic suppliers. We share the current state of this
practice in Figure 9.
Figure 9. Multi-Tier Supplier Visibility
Note in Table 2 that when companies rate themselves as mature on risk management, they have two
dominant characteristics. The first is leadership support and the second is financial supplier sensing.
Financial supplier sensing can either be managed through a third-party or through the use of financial
data from third-party aggregators like YCharts, or OneSource (now Avention).

Table 2. Characteristics of Companies Rating Themselves Higher on Supplier Risk Management Programs
Preventing a Material Event
The value of risk management is rooted in business continuity. In 2014 companies experienced an
average of three business discontinuity events, with at least one resulting in a material impact to the
balance sheet included in financial reporting. This is significant. In the survey, 28% of the supply
chain disruptions led to reporting balance sheet impacts.

Figure 10. Impact of Disruption
While 22% of companies surveyed reported a strong improvement in risk management, this data is
similar to the survey response from a year ago. While the populations of the two surveys are
different, and it is difficult to draw conclusions, we do know from discussions with supply chain
leaders that many are struggling to make progress. Many feel that they are treading water.

Recommendations
The most advanced risk management programs are deeply rooted in preventive measures. The focus
is top-down and horizontal—working across functional silos—and led by a business leader. They are
also deeply embedded into other horizontal processes like network design, corporate social
responsibility, and supplier development.
When it works well, companies are aggressive in the design of inventory buffers, with active work
through network design to build the right push-pull decoupling points, implementation of supplier
monitoring and scorecarding, and the development of business continuity plans. The common
threads are prevention, and readiness.
Figure 11. Important Techniques to Mitigate Risk by the Survey Respondents
In building and rethinking risk management programs, keep these five elements in mind:
1) Leadership Matters. In this report, companies who rate themselves higher on the execution of risk
management programs are more likely to be driven by leadership support. This is not a program that
can be effective managed bottoms-up.

2) Focus on Multi-Tier Inventory Management. The management of the forms and function of
inventory, and the design of the network, are paramount to buffer risk. Inventory is the most important
buffer and companies with strong risk management programs define an inventory planning position and
are active and knowledgeable about the use of multi-tier inventory management technologies.
3) Implement Supplier Sensing and Supplier Visibility Programs. Visibility of suppliers—locations
of facilities and their suppliers—is the first step. The second is supplier financial sensing. Companies
with advanced risk management programs redesign the role of procurement to build, not just audit,
value chain relationships.
4) It Is About Much, Much More Than Technology. While technology vendors espouse risk
management as a technology, it is much more than the deployment of a technology. While visibility
technologies are an important part of the solution, they are not the answer.
5) Things Happen. Not All Risks Can Be Prevented. Demand and supply risks are increasing. They
cannot be totally prevented. The design of inventory buffers and supplier visibility programs are critical;
but, it is also important to have well-defined practices and drills to help the organization to mobilize
quickly in the face of a disaster. It is not a time for indecision. When a disruption happens, there needs
to be a clear definition of protocols and responsibilities. Many advanced companies implement drills
and practice deployment to ensure readiness.
Conclusion
The global supply chain has more risk than the regional supply chain and requires an active and
robust risk management program. The most successful are multi-prong with an equal focus on
prevention and recovery. The mature supply chain leader knows that a disruption lies ahead. They
are impossible to eradicate. Having a mature risk management program is the foundation for
business continuity in the face of an uncertain world. For the global supply chain, a robust risk
management program is essential.

Appendix
In this section, we share the demographic information of survey respondents, along with research
findings to support the key insights listed in this report.
The names, both of individual respondents and companies participating, are held in confidence. We
never share the name of the respondents. In this section, the demographics are shared to help the
readers of this report gain a better perspective on the results. The demographics and additional
charts are found in Figures A–G. To help the reader, at the bottom of each image are the specific
questions asked in the survey along with the survey demographics.
Figure A. Industry Overview of Respondents

Figure B. Overview of Company Respondents
Figure C. Role and Regional Demographics

Figure D. Reporting Structures: Responsibility for Risk Management in the Organization
Figure E. Relevant Business Pain by Business Role

Figure F. Nature of Supply Chain Risk Management
Figure G. Change in Risk Management Performance vs. Five Years Ago

Prior Reports in This Series
Over the course of the last three years, our research methodology and report content has changed
and matured. You can track our progress, and find relevant, industry-specific information here:
Inventory Optimization in a Market-Driven World
Can you afford the Risk?
Building Effective Business Networks in Process Industries
Building B2B Networks: Who are the Players?

About Supply Chain Insights LLC
Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is focused on delivering
independent, actionable, and objective advice for supply chain leaders. If you need to know
which practices and technologies make the biggest difference to corporate performance, turn to us.
We are a company dedicated to this research. Our goal is to help you understand supply chain
trends, evolving technologies and which metrics matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written three books. The first book, Bricks
Matter (co-authored with Charlie Chase). published in 2012. The second book, The
Shaman’s Journal, published in September 2014, and the third book, Supply Chain
Metrics Metrics That Matter, published in December 2014. Her fourth book The
Shaman’s Journal 2015 will publish in September 2015.
With over thirteen years as a research analyst with AMR Research, Gartner Group, and Altimeter
Group, and now as a Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a
year on the evolution of supply chain processes and technologies. Her research is designed for the
early adopter seeking first mover advantage.

Endnotes
i
B2B Networks in Process Industries, Supply Chain Insights, March 10, 2015, http://supplychaininsights.com/building-effective-
business-networks-in-process-industries/
ii
Lora Cecere, Forbes, January 10, 2015, http://www.forbes.com/sites/loracecere/2015/01/08/the-chassis-is-the-missing-link/
iii
Source: Captain J. William (Bill) Cofer, President, Virginia Pilot Association, presentation to Virginia Port Authority Virginia's
Offshore Fairways (November 27, 2012)/http://www.virginiaplaces.org/transportation/shiptransport.html

The Global Supply Chain Ups the Ante for Risk Management

More Related Content

What's hot

Viewers also liked

Similar to The Global Supply Chain Ups the Ante for Risk Management

More from Lora Cecere

Recently uploaded

The Global Supply Chain Ups the Ante for Risk Management