Question

in 300 words plus

Discuss the different components of the Supply Chain, and the legal issues and risks associated with each component.

Answer 1

There are different types of supply chain risk, and nowadays, these can be very easily exposed due to the power of social media and be incredibly detrimental to your business. This article looks at how each one can be easily avoided by capable senior management.

Risk results from any form of uncertainty in a process or the environment. Risk is relative to the ability to identify and predict its impact in advance. More importantly, it is relative to the ability to prevent the occurrence of risk in time and to minimise the outcomes of the risk if, in spite of the preventive action, it occurs after all. There are many areas of study supporting risk assessment and recommendations of how to deal with it. Whole industries and professions, the insurance and actuarial profession, for example, are built on the assessment, calculation and management of risk.

In the Supply Chain, risks can occur in supplying a product or service to a customer in terms of cost, timely delivery and impact on image. The sourcing and supply of products and services to businesses and consumers is becoming more and more complex and with it, the assessment and management of the associated risk. Some risk management techniques and modelling can be applied to the supply chain but typically will not be as mathematically sound as in the insurance industry, as there is not an equivalent comparable body of knowledge and experience to quantify all potential outcomes.

Supply chain risk affects a wide range of stakeholders. The direct players in the supply chain are the producers, the logistics, retailers and the customers. In addition, there are the providers of finance, the consumer pressure groups, and politicians to name a few.

External risk is driven primarily by issues which lie outside of the direct influence of the business. This includes not only the national political situation but the volatility of the global political landscape. Trying to predict how politicians will decide is probably not anyone’s priority activity, as it would require some type of modern-style crystal ball, but it is essential to keep up with what could potentially influence business operations and a recovery or mitigation plan.

This has a major effect on financial markets and interest rates which in turn will affect business decision-making. We saw the effects of that during the recent recessions when businesses reduced variable costs, stopped borrowing for investment, and worked on utilising existing resources as best as possible.

Purchasing raw materials and commodities is often underwritten by banks and financial institutions. Transparency of where product is sourced from, under what conditions it was produced, and where it is intended to go are important criteria for the financing decision. Any risk that the product source is unethical can impact the ability of the business to access future finance, which is a risk for the bank and the business. This means anyone involved in the sourcing of materials must have processes in place to ensure that they are not exposing the company to risk. The financing institution is also open to public scrutiny which needs to be managed. In the age of social media, information which may previously have been withheld or not available to the press is now accessible by a range of people and can very quickly become viral. This means that the impact of a risk on reputation is higher and less quantifiable in advance.

Suppliers and third parties in a process can be an exposure if there is insufficient control over what is happening. The European horsemeat scandal is a good example of risk with far reaching effects. The suppliers in this chain were reliant on the information provided on the source of meat. The high input price of meat led to some suppliers outsourcing the supply to smaller subcontractors and, either turning a blind eye to inconsistencies in the product description, or trusting the process to deliver.

Consumer groups testing the quality and source of meat act as an additional check point in the process and expose the issues. The impact of the risk taken here is the public image of the retailer in the first instance as the supplier is largely unknown to the consumer. The reverse of this process is the opportunity for those who control their supply chain and can prove the authenticity of the product supplied, in this case, local butchers who can trace the beef back to the cow from which it came. In other cases, consumers are showing a willingness to pay a premium for ethical products. So in summary, it is about weighing up the risk to image and loss of revenue, and consumer support.

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.