Four supply chain risk management tips
The practice of risk management has been a common topic for the electronics supply chain for quite some time. Recently, however, issues and concerns pertaining to supply chain risk management have become more pronounced.
Perhaps the intense interest has been driven by extreme events in the past year, such as natural disasters (hurricanes, tsunamis, etc.), as well as emerging threats and systemic vulnerabilities (oil dependence, armed conflicts, etc.). For example, in October 2012, Hurricane Sandy closed ports and airports in the northeastern United States. Floods in recent years also plagued Thailand, hitting more than 1,000 factories and creating huge problems for the automotive and high-tech industries.
"The risk becomes more complex as supply chains are more global in nature," said Richard Waugh, VP of corporate development at Zycus, a procurement solution vendor. "It has taxed and gone beyond what the legacy capabilities might be in some organizations."
Further adding to the tension is an increased understanding of supply chain security, including regulatory risk, brand risk and counterfeiting. Then, of course, are the normal risks of disruption, allocation, capacity, quality problems and shortages.
Moreover, the nature of the supply chain has evolved rapidly. Taylor Wilkerson, program manager of supply chain management at consulting firm LMI explained: "In general, we've seen risk management shift quite a bit as companies have become more specialized, which in turn has led to the extension of the supply chain. Rather than the supply chain being two or three tiers, especially in [the] electronics world, you have retailer, final assembly, each of the components in that assembly and then the subcomponents. It's really extended the supply chain and shifted the role of risk management from having to manage immediate suppliers to having to manage several tiers up and down in the supply chain."
For large organizations, creating a comprehensive risk management approach is daunting. For midsized organizations, it's an even bigger stretch. "Smaller organizations are very much on the reactive side of risk management," said Bindiya Vakil, CEO and founder of Resilinc Corp. "They focus more on day-to-day operations. It is difficult for them to have time, resources and money for more proactive initiatives."
Today, the vast majority of midsized companies do not have a mature risk management system in place. The Corporate Executive Board Company (CEB), a member-based advisory company, conducted a poll that found that fewer than one in five midsized organisations falls into that category.
Fortunately, these smaller supply chains can successfully borrow from the big-company risk management playbook to address risk without having to have a centralized risk management programme. Using these lessons, midsized organisations will be able to build a robust and effective risk management strategy.
Lesson 1: Think beyond first-level risk. Today, organisations must think beyond solely looking at events that would stop materials from moving or being produced, to any event that would create risk to the corporate brand, workforce management, environmental impact and sustainability.
Further, it's important to think beyond the walls of the organisation to see potential areas of risk. "A lot of smaller organisations tend to look at risk management and business continuity without understanding there is risk the supply chain that can do a lot of damage if a supplier has a risk event," said Wilkerson.
Lesson 2: Focus on measuring and defining risk exposure. "Don't focus on past incidences as [a] way of defining what risks you are exposed to," said Wilkerson. "It's a natural human tendency to look to the past, but that is not necessarily a good indication of what risk is going to be."
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