Many Companies Falling Short on Supply Chain Risk Management

According to a survey of 600 manufacturing and retail executives conducted by Deloitte, 71 percent of the executives surveyed view supply chain risk as “an important factor in their companies’ strategic decision making, including 20 percent who view it as extremely important.” Yet, 42 percent of the executives from large companies said their supply chain risk management programs are only somewhat or not effective.

Simply put, many companies are still falling short on supply chain risk management, and they continue to pay the price.

The report — The Ripple Effect: How manufacturing and retail executives view the growing challenge of supply chain risk — contains many interesting findings and stats. Here are some that caught my attention (quoted from the report):

  • 48 percent of the executives said the frequency of risk events that had negative outcomes has increased over the last three years, while only 21 percent reported a decrease.
  • 53 percent of executives said that these events have become more costly over the last three years, with 13 percent who said they had become much more costly.
  • Executives considered margin erosion to be more costly than other types of supply chain risk events, with 54 percent of the respondents citing it as one of their top two issues.

The relatively low use of technology is another issue revealed by the survey. Only 42 percent of the respondents are using supply chain mapping/visualization tools, and even fewer are using predictive modeling, risk sensing data, and business simulation tools. As the report states, “the limited use of such tools may contribute to the challenges associated with risk management strategies, measuring program benefits, establishing effective performance metrics, and supply chain risk governance.”

When asked about the most effective strategies for preventing or recovering from negative outcomes of supply chain risk events, the executives ranked “Building stronger extended value chain relationships” as the top strategy (24 percent). However, they also said that “Lack of acceptable cross-functional collaboration” was the greatest challenge to effectively manage supply chain risk (32 percent). In other words, since collaboration is at the heart of building stronger relationships, it is also at the heart of effectively managing supply chain risks.

Here’s a head scratcher: Although the executives pointed to margin erosion as the most costly impact of supply chain risk events, and they said these events have become more costly in recent years, they also reported that the “cost of implementing supply chain risk management strategies” is a big challenge, along with not having “the required data on risk events or outcomes to support investment.”

So, does this mean that despite the growing costs of supply chain risk events, the costs are still not great enough to justify investments in supply chain risk management? Or does it mean that companies are just guessing at the costs and don’t really have a way to accurately measure them? Based on my conversations with supply chain executives, it’s more the latter.

The bottom line, in my opinion, is that companies either believe in supply chain risk management or they don’t. It’s either embedded in their DNA, in the same way they embed Lean/Six Sigma principles into their culture, or it isn’t. If you don’t truly believe (have faith) in the value of supply chain risk management, and you don’t make it part of your corporate culture, then nothing else — such as investments in talent, technology, and building stronger collaborative relationships — will follow.

Like I said back in January (in “Rethinking Supply Chain Risk Management”), supply chain professionals need to get to the point where talking and thinking about risk is as common and instinctual as talking and thinking about cost and service.

For some added perspective on this topic from someone on the frontlines of risk management, watch my video interview with John J. Brown, Director of Supply Chain Risk Management at The Coca-Cola Company, which I conducted about a year ago.

What are your thoughts on supply chain risk management? Do the survey results surprise you or validate your experience? Post a comment and share your viewpoint!