For two years, businesses were predominantly focused inwards as they battled their way through the financial crisis. To make matters worse, the credit crisis also impinged upon their risk management procedures, as business leaders were faced with some pretty stark cost-cutting choices in the darkest days of the crisis. As a result, resources for risk processes were often sacrificed for the sake of immediate savings.
Cost-cutting in supply chain management was no exception. However, as conditions are now easing, businesses should take proper stock of the state of their supply chains.
In the past year, the number of product recalls also testify to just how much risk within supply chains is not being properly addressed. However, I cannot say I am exactly surprised.
It has long been my experience that many companies are too focused on just one or a few dimensions of their supply chain risk. Often, this has stemmed from a lack of clear ownership for these risks, or a focus on the one dimension of a supply chain that its owners understand best.
I believe that many businesses do not understand their supply chain risks as well as they should. For example, risks in respect of the fiscal health of their key suppliers or even the way in which the crisis has affected those suppliers’ quality controls.
In Asia, for example, many manufacturers were forced to trim headcount among non-engineering or production staff during the downturn. This could mean that their own risk management checks and balances would have suffered.
Asian companies often stand out for the high quality and low cost of their products. The price competitiveness of internationally traded products is dependent on various factors that directly or indirectly expose these companies to supply chain risk.
For instance, with so many risks associated with the physical transfer and safety of the goods, political and economic uncertainties and security threats, there is a need for an organised risk mitigation plan.
Small Supplier, Big Risk
Some of these risks can leave a business dangerously exposed to the risk of imminent supply chain failure. For example, many businesses may look only to their biggest suppliers for any obvious signs of pain, believing that the larger the supplier, the larger the impact. This can be a mistake.
Even the smallest supplier of the smallest component can cause just as much disruption as the largest supplier of the largest component. An extreme example of this would be the impact on a prison complex from a failure of the locks its supplier has provided.
Some large Asian businesses, with a history of exemplary supply chain management, have already felt the impact of these seemingly minor failures. I cannot help but wonder just how great the problems would be for large organisations that do not have that background or experience in supply chain management.
This is a problem that is only going to get worse. As companies emerge from the recession and refocus their sights on a growth agenda, a flurry of new products is likely to be brought to the market, across all sectors. This will place a greater strain on already beleaguered supply chains.
If and when such problems do come to light, these may be down to failings of the overall system of managing supply chain risk, rather than the failing of an individual component or supplier.
This is why it is important that businesses looking for rapid, post-recession growth should give some serious thought to reinvesting in their risk management processes and bringing them up to full strength as soon as possible.
Even if a business were able quickly to deal with the operational fall-out from an individual failure within the supply chain, the damage to reputation and brand could haunt the business for far longer.
It is worth remembering that perception is the key; being perceived to have a shaky, unstable supply chain is something businesses do not want.
Who Owns it Anyway?
Far too many companies do not have a single person in charge of supply chain risk. Instead, you often find multiple departments involved, each with a vested interest. For example, a team may constitute people from the engineering department who are focused on product quality or innovation, and others from finance who are concerned only with the numbers. What then happens is that the dominant personality in the group is often the one whose agenda is pursued most vigorously.
The issue of ownership must therefore be addressed if companies are going to think long and hard about their supply chain management. I believe that supply chain risk could become the key business issue in the coming months, in exactly the same way that cash management was an issue for company boards during the credit crisis.
Lots of hard work will be wasted if there is little alignment of risk management efforts across a business. For this reason, businesses should have one person in charge of supply chain risk; someone who runs the agenda, is crystal clear on all aspects of the risk strategy and very clearly owns this strategy.
The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in Singapore.
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