In summary, the author provides five important considerations for managing supply chain risk. While stated, to move forward in this world, avoiding risk is impossible, so we have to take intelligent risk. These are:
- innovation and efficiency in contracting management;
- strategic requirements for supplier insurance, indemnification and limitations of liability;
- provider optimization and redundancy;
- supplier financial stability visibility; and
- proper diligence in operational supplier assessment reviews.
Here are those components from a food safety perspective.
Innovation and efficiency in contracting management - it is important to review contracts regularly, updating to current systems of management, and incorporating information such as updated specifications, required controls. Goal is to avoid outdated information on contracts.
Strategic requirements for supplier insurance, indemnification and limitations of liability - Are they
required to support, and can they financially support an issue that they cause to the product you sell.
Provider optimization and redundancy - Does the supplier have a back-up plan to get you product or do you have a back-up plan (secondary supplier).
Supplier financial stability visibility - Do you know that your entire supply chain can remain financially viable. This is especially important when we work internationally.
Proper diligence in operational supplier assessment reviews - this is one where the technical people are most actively involved. Sure we can review audits, but are we following up on those audits to obtain verifiable proof that our suppliers are responding to the audits.
SupplyChain Management Review
http://www.scmr.com/article/five_techniques_to_manage_supply_chain_risk
Five Techniques to Manage Supply Chain Risk
If procurement executives don’t take intelligent risks, they cannot provide maximum value to their companies. Here are five techniques to manage both anticipated and unanticipated events in the supply chain.
By Mark Trowbridge · November 2, 2017
Risk has always been part of the supply chain. It’s a reality inside and outside the four walls of any organization. It’s no surprise then that as Enterprise Risk Management (ERM) programs proliferate, they have naturally begun to address anticipated and unanticipated events occurring both upstream and downstream in the supply chain.
Upstream of an organization are the suppliers who create goods and services used in a company’s own operations. These include raw components or materials that flow into direct manufacturing as raw materials. There are also indirect products and services that facilitate the company’s actual operations.
The downstream supply chain efficiently distributes a company’s products or services to its customers. All contracted suppliers, both upstream and downstream, must be proactively managed to minimize financial, confidentiality, operational, reputational and legal risks.
You don’t have to look any further than recent headlines to see potential fallout here. Did Equifax have proper data liability insurance coverage in place before 143 million accounts were hacked? And even if they did have coverage, how much was their reputation and customer account credibility damaged? This is still playing out, so not even Equifax management yet knows the impact of the risks taken.
Ideally, if risk is properly managed, nothing occurs that has a negative impact on operations or profitability such as what happened to Equifax, Samsung, Chipotle or any of the other companies that have seen their share price fall and their value erode following an untoward event. But, after all, shouldn’t the point of an ERM program be to eliminate all supply chain and legal risk for our employers? The answer is an emphatic “no.” The only way to truly eliminate risk would be to never conduct any procurement or contractual activities using third-party suppliers. What private or public sector organization could operate that way? Not a one.
Instead, a rational objective for procurement and supply chain leaders should be to create a secure but high-performing supply chain. This is one in which risk can be minimized while value-added business relationships can flourish. Think of it as “intelligent risk management.”
I learned this lesson in one of my early corporate positions directing sourcing and contracting management activities for one of the world’s largest companies. My boss included an interesting objective in my job description. He insisted that I develop a willingness/ability to take “intelligent risks” and then included it in my annual evaluation. You see, he realized that an overly aggressive approach to contracting management for our enterprise with 195,000 employees and 110 subsidiary companies worldwide could shut down our ability to be fast and nimble.
Along with his mentoring, I learned ways to execute well-researched business plans while properly managing risk, which made a huge difference in my career. My success was measured by balancing well-researched supply management saving initiatives with carefully thought out fallback plans. I knew my performance evaluations would suffer if I did not consistently push the limit of what could succeed in the supply chain arena—if I didn’t take intelligent risks.
My boss often reminded me of something that professional hockey star Wayne Gretzky once said: “You’ll always miss 100% of the shots you don’t take.” During my last two years in that corporate role, my team was very successful in deploying this balanced approach, saving shareholders a quarter of a billion dollars and reducing external legal support expenses by nearly a million dollars annually, while not experiencing a single supplier lawsuit with a portfolio of several thousand sourced supplier relationships.
Now, on the surface, this all sounds good. Unfortunately, ERM is too often used as a weapon against procurement executives. They can be beaten down by their firm’s own siloed ERM or legal groups and forced to develop and use cumbersome processes. Such precautions may give the appearance of diligence but in reality they actually reduce the company’s ability to truly manage supply chain performance in a risk-averse manner.
Worse yet, this can create a culture with an outsized fear of failure. As a result, people:
•delay or avoid making difficult decisions;
•push responsibility onto others;
•fail to acknowledge/confront problems; or
•try and eliminate every conceivable chance of failure.
From a procurement and supplier relationship management perspective, examples of overly risk-averse procurement behaviors include:
•cumbersome or overly-restrictive approval processes;
•unwillingness to identify or “try” new suppliers, no matter how well-qualified;
•unwillingness to source from low cost country sources;
•an inclination to select established and bloated supplier organizations rather than investigating and qualifying best practice supplier firms that lead their sectors (ignoring billionaire Warren Buffet’s comment about industry evolution that, “first come the innovators, then come the imitators, and then come the idiots.”);
•failure to empower user departments with user-friendly methods of ordering products and services;
•insistence upon excessive procurement involvement in low-value transactions;
•acceptance of excessive inventory levels for safety reasons; and
•failure to secure best pricing due to unwillingness to make long-term volume commitments.
It is now many years later and I’m privileged to work in the consulting realm with many world-class procurement organizations. The senior supply chain leaders I find most impressive are those who demonstrate a willingness to move forward with key supply chain improvement opportunities. These are people who are willing to take intelligent risks in order to generate profits for the bottom line.
So, what are key ways that procurement professionals can contribute to their organization’s overall enterprise risk management strategy?
I suggest five supplier risk management techniques that make a significant contribution to ERM security. These are:
•innovation and efficiency in contracting management;
•strategic requirements for supplier insurance, indemnification and limitations of liability;
•provider optimization and redundancy;
•supplier financial stability visibility; and
•proper diligence in operational supplier assessment reviews.
All five are of equal importance to making intelligent risk work. They are even effective at dealing with so-called “black swan” events that cannot be predicted using normal methods of statistical analysis.
For instance, did Apple know that an earthquake and tsunami would shut down critical component supplier manufacturing facilities in Japan during 2011? Probably not. But accounts of their prescient negotiation of protective Force Majeure language in key supplier contracts apparently guaranteed Apple first right of resumption, mitigating the effects of that black swan event.
Make these five techniques part of your process and your company can be in a similar risk management position across the supply chain.
http://www.scmr.com/article/five_techniques_to_manage_supply_chain_risk
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