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TraiT 9 ability to anticipate and Manage risk

This chapter turns our attention to a supply chain excellence trait that is rapidly emerg- ing in importance— the ability to anticipate, evaluate, and react to unexpected disrup- tions to the supply chain. In other words, supply chain risk management. Environments of rapid change and ever-enlarging global supply chains make risk management an essential ingredient for success today. Unfortunately, effective risk management capa- bilities are currently found only among a small cadre of leading firms. Going forward, though, risk management must become a core capability of any supply chain organiza- tion that hopes to succeed. Leaders understand risk. They know how to prepare for both expected and unexpected disruptions, and they have contingency actions that can be readily put into effect. Others give lip service to risk management. Their “plan” is to wait for a disruption to happen and then rely on heroic efforts to overcome the situa- tion— whatever the cost. In short, they assume a completely reactive posture.

The results around risk management in the 2008 Global Survey of Supply Chain Progress were generally disappointing. The responses showed insufficient attention being paid to this critical part of the business as well as a dearth of spe- cific contingency plans to cope with unexpected events or disruptions. While most organizations seem to recognize the need for risk management— as do most sup- ply chain professionals— there is little in the way of workable strategies or struc- tured approaches in place for anticipating and responding to supply chain risks. Once again, the leaders are the exceptions. A small group of companies around the world have aggressively developed notable competencies in anticipating and responding to disruptions in order to minimize their negative impacts on perfor-

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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206 Diagnosing Greatness: Ten Traits of the Best Supply Chains

mance. In this chapter we draw upon the experiences of the leaders and offer a prescriptive framework that can help firms find clarity in this murky area of main- taining supply chain continuity.

risk ManageMenT is a nebulous buT growing ConCern

Our research and that of others confirms that risk management is much like the weather: Everyone talks about it, but not much is done about it. Christian Verstraete, a manufacturing executive at Hewlett-Packard (HP), noted in CSCMP Supply Chain Quarterly that, “Although principles are becoming more widely understood, many companies still do not pay much attention to managing risk. A survey conducted by Aberdeen Group in 2007, for example, showed that more than 50 percent of enter- prises either are not concerned about risk or have no formal process to address it” (Verstraete 2008).

Professors Donavon Favre and John McCreery of North Carolina State University describe the situation even more succinctly, noting in Supply Chain Management Review (SCMR), “Put simply, modern supply chains now run substan- tial risks of performance shortfalls” (Favre and McCreery 2008). Citing a report by risk advisory firm Marsh Inc., they note that 71 percent of the risk managers sur- veyed reported an increase in supply chain disruptions that had a financial impact. The expansion of global supply chains coupled with the growing number of inter- faces with outside partners have greatly increased the potential for supply chain disruption— a condition crying out for solutions.

Though not particularly encouraging overall, our survey results do show some positive trends on the risk management front. There are indications, for example, that leaders have learned to analyze what has happened in the past and have uncovered the root causes to prevent future occurrences, thus verifying that a penetrating analysis leads to better results. The root causes, by the way, typically are many and varied. The main ones cited by the survey respondents were weak inventory planning and inven- tory level strategy, unstable global sourcing points from new and unproven suppliers, lengthening global supply chains, and critical trading partner vulnerabilities.

With these and related concerns as our backdrop, let’s look at the current state of risk management in organizations— starting at the top. Working on the premise that for any program or initiative to succeed, it must have visible support from top management, we asked if the responding companies had sufficient executive visi- bility and accountability for their supply chain continuity and protection efforts. The results from the 2008 survey, depicted in Figure 11.1, were disappointing, showing that only 54 percent responded positively. So this is a vitally important capability that is missing from almost half of the responding firms’ agendas.

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 207

When we went a step further and asked if the firm’s planning identified con- tingencies with a risk analysis and scenario evaluation, only 40 percent gave posi- tive responses, as shown in Figure 11.2. The disturbing underlying message here seems to be that respondents would prefer reacting quickly to bad situations rather than anticipating problems and being ready with an appropriate response. Finally, we asked if the organization had well communicated contingency plans in case of a significant supply chain disruption. As we can see in Figure 11.3, only 41 percent responded in a positive manner.

An even more telling point of differentiation is the responses from the leaders versus the followers and laggards on the key risk management issues. As Figure 11.4 shows, the leaders reacted more positively to all of the risk management statements.

My organization has sufficient executive visibility and accountability for supply chain continuity and protection.

3% 16%

26%41%

13%

Strongly disagree Disagree Neutral Agree Strongly agree

Figure 11.1 Risk management visibility

Our planning identifies contingencies with a risk analysis and scenario evaluations.

32%

24%

33%

Strongly disagree Disagree Neutral Agree Strongly agree

Figure 11.2 Planning and risk analysis

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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208 Diagnosing Greatness: Ten Traits of the Best Supply Chains

The gap is particularly wide when it comes to contingency planning and risk mitigation efforts. Our assessment is that while most companies say they are try- ing to learn from failures and identify root causes, only the leaders are taking the more proactive steps of using these data as a means of prevention.

whaT is supply Chain risk?

So what are we considering here? Why is risk such a critical supply chain issue? Let’s begin with some definitions. The dictionary defines risk as the quantifiable likelihood of loss or less-than-expected returns. That’s helpful in the sense that it tells us risk is something to be avoided or minimized. From a business point of view, risk is connected to issues like not meeting your objec- tives or your promises to the marketplace. These shortfalls often have to do with unexpected circumstances that negatively impact performance. Risk also involves failing to capitalize on an opportunity or to respond properly to an unwanted event.

Wikipedia moves us closer to the understanding we need, defining risk man- agement as “the human activity which integrates recognition of risk, risk assess- ment, developing strategies to manage it, and mitigation of risk using managerial resources. The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.” This broader definition now considers the firm’s ability to reduce and cost-effectively control any unanticipated or calamitous sup- ply chain disruptions.

My organization has well-communicated contingency plans for use in case of a significant supply chain disruption.

29%

26%

33%

Strongly disagree Disagree Neutral Agree Strongly agree

Figure 11.3 Supply chain contingency plans

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 209

Now we are closer to the heart of the matter. In our view, supply chain risk denotes a potential negative impact to an asset or some characteristic that could diminish business value, arising from some present condition or future event. Supply chain risk management, then, is the process of measuring or assessing risk and developing strategies to manage it.

In reviewing these definitions, a clarification is in order: Managing supply chain risk is not about avoiding risk or never taking calculated risks. Instead, it’s about having the organizational awareness of risk, the capability to analyze and assess vulnerability, and the ability to react to risk with the correct decisions.

My organization has sufficient executive visibility and accountability for supply

chain continuity and protection

My organization pays sufficient attention to supply chain vulnerability measures

and risk mitigation actions

My organization analyzes potential root causes for failures in the supply chain

My organization applies lessons learned from supply failures in the past

My organization has well-communicated contingency plans for use in case of a

significant supply chain disruption

0 20 40 60 80 120100

Percent responding agree or strongly agree

Leaders Followers Laggards

Figure 11.4 Differences in risk management

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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210 Diagnosing Greatness: Ten Traits of the Best Supply Chains

Making the correct response presupposes that you know what’s at stake if you don’t respond effectively. HP’s Christian Verstraete calls attention to the impor- tance of recognizing risk in the first place, suggesting, “Before a company can address the issue of risk with its trading partners, it has to identify the specific risks it might face. Recognizing potential risk is one way of understanding what could happen and how it might affect the supply chain” (Verstraete 2008).

Our survey results provide a snapshot of the risk concerns that are top of mind among today’s supply chain managers. Figure 11.5 shows that the majority of respondents (63 percent) expressed greatest concern over inventory planning and availability, though this concern is more pronounced among the laggards and fol- lowers than leaders. Following the inventory category, which is mainly in the operational domain, the four most cited concerns revolve around global sourcing and trade issues. These concerns speak to more structural supply chain factors. The number one concern listed in the other category was potentially rising input costs, especially the cost of fuel.

Are these types of supply chain risks truly worth worrying about? Several studies provide evidence that the answer is emphatically yes. Figure 11.6, cour- tesy of Hendricks and Singhal (2000) by way of Lehmann Brothers, shows a compelling link between supply chain management failures and stock price per- formance. Specifically, average shareholder returns decline dramatically when a supply chain problem is announced. Clearly, neglecting to proactively prevent and respond to problems such as these puts the firm in a precarious position. The reality is that an enterprise can be destroyed by one catastrophic event. The leaders strive mightily to keep this from happening. They go into their databases to find where risks have occurred before, anticipate interruptions and complica- tions, and build contingency plans for the unexpected. Dell stands out in this respect as a leader with contingency plans for just about any scenario that can occur. The computer maker has relied on such plans when faced with dock strikes, hurricanes, and the like.

inTangible risk Can reduCe ValuaTion

Wikipedia provides another useful definition for our inquiry into this greatness trait. It defines intangible risk management as “a new type of risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identi- fication ability. These risks directly reduce the productivity of knowledge workers, and decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality.” These intangible risks can be thought of as ones that are hidden to the company, either because they are especially opaque or because the company lacks the focus or ability to uncover them.

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 211

0 10 20 30 40 50 60 70 80

Inventory planning and inventory level strategy

Lengthening global supply chain

Unstable global sourcing points

Critical trading partner vulnerabilities

Visibility into your trading/outsourcing partner shipments

New import and customs regulations

Responding to environmental/green concerns

Delays due to port congestion

Potential security breaches or terrorist attacks

Responding to concerns about ethical trading

Changing European Union conditions

Percent indicating that the issue is a top concern

Leaders Followers Laggards

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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212 Diagnosing Greatness: Ten Traits of the Best Supply Chains

Too often companies base supply chain strategies solely on having the lowest operational costs, totally disregarding risk management. This approach increases vulnerability and can reduce overall competitiveness. The reality today is that a truly competitive supply chain requires a much deeper analysis of visible and hid- den costs as well as a clearly articulated risk management strategy. Hidden risks can create very visible problems tomorrow, including disruptions to normal lead times, missed sales due to out-of-stocks, deteriorating service levels, lost proximity to customers, unexpected political complications, lost profits due to currency fluc- tuations, increased network complexity, unanticipated demand variations, capac- ity upsets, and quality problems.

These problems typically account for a large part of the real total landed costs across a global supply chain, yet they do not always show up on expense state- ments. Although supply chain risks have a high probability of occurring, they are often ignored because the organization is unable to identify them and is therefore unable to develop appropriate responses. Attending to such risks will create imme- diate and sustainable value that, in turn, will drive more predictable earnings per share and higher market valuations.

A Risk MAnAgeMent FRAMewoRk is A supply ChAin essentiAl

Consider a typical lament from senior supply chain officers, “I’m under new pres- sure. My company is increasing its number of suppliers in low-cost countries. We’re into regions of the world with which I am unfamiliar and where cultures, social attitudes, and risks are new and challenging. These risks and the general economic consequences are getting attention with our key stakeholders. How do I

Average shareholder return on day announced

Changes by customers Ramp/roll out problems

Production problems Development problems

Parts shortages

Public announcements of supply chain problems.

Quality problems

-5

-10

-15

Figure 11.6 Why measure risk?

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 213

make sure these risks don’t explode and jeopardize all that we have accomplished with our supply chain efforts?”

Stan Smith, information technology manager at Quality Plus Engineering, offers an eight point response to this oft-uttered lament. He recommends that sup- ply chain risk management proceed as follows:

1. Determine management’s appetite for risk 2. Identify supply chain risk events 3. Analyze risk events and assign risk vectors for likelihood and severity 4. Quantify and determine potential risk products and prioritize the

risk magnitudes 5. Begin working with the highest risk products 6. Determine appropriate controls 7. Implement and monitor risk controls 8. Manage risks by monitoring and repeating the process (Smith 2005)

Let’s flesh out some of these steps in more detail. Consider Step 2, which entails identifying the types of risks that are pertinent to your company. Figure 11.7 jux- taposes two ways of categorizing risks that are discussed by Favre and McCreery (2008) and by Verstraete (2008) respectively.

Favre and McCreery focus on the location and source of supply chain risks, stat- ing that some risks are specifically associated with a given industry/commodity or a particular geographic region. Other risks can be more broadly associated with the general environment, meaning they can occur anywhere. Industry/commodity risks include specific quality problems, labor or material shortages, safety issues, and price fluctuations that may occur in a given commodity area. Geographic risks include political issues, infrastructural challenges, and currency fluctuations in a given country or region. Environmental risks entail a broader set of risks that can

Level of risk effects

Operational risks Structural risks

Location / source of risks Industry/commodity risks

Country/regional risks

Environmental risks

Figure 11.7 A risk categorization framework

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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214 Diagnosing Greatness: Ten Traits of the Best Supply Chains

occur at any place or time. Events such as wars, natural disasters, security breaches, and terrorist threats belong to this category.

Verstraete identifies two impact levels for risks: operational and structural. Operational risk includes events that happen to actual supply chain operations— for example, late shipments or lost/damaged products. Operational risks can typi- cally be addressed without a wholesale change to the fundamental business operation. Structural risks, on the other hand, require companies to change the way in which they operate. Verstraete gives the example of a country of origin essentially shutting down because of disease or widespread political unrest. This type of structural risk would require a firm to rethink its supply chain network and quickly transform it.

The framework shown in Figure 11.7 can be used to bring together the parties inside and outside the firm who are knowledgeable about the risk areas to be assessed. Risk planning should involve commodity experts, regional specialists, and experts in various aspects of security and disruption management. The team also needs to include operational planners as well as professionals with more stra- tegic level sourcing and network design expertise. By focusing on each of the six blocks in the framework, planning teams can brainstorm a comprehensive list of potential risks spanning the firm’s major commodities and operating regions. Bringing trusted suppliers and customers into the process will, of course, enhance the breadth and depth of planning.

Once the operational and structural risk boxes in Figure 11.7 have been filled in with the brainstorming ideas, the next steps (Steps 3 and 4 in Smith’s list) are to analyze and prioritize the risks. A time-honored approach is to rate and rank risks based on their likelihood of occurrence and potential severity of impact. However, if the analysis stops there, it neglects the intangible risks, which can be every bit as damaging to the supply chain as they are hard to detect. Early detection of risk events is an important consideration in risk planning, so the detectability of risks is cer- tainly an important factor to consider.

We suggest a two-stage approach for analyzing risks. First, rank the risks based on a combined score of likelihood and impact. Though this technique can be made much more sophisticated, it usually suffices to rate risks as high, medium, or low in terms of their likelihood and impact. The second step is to categorize the risks by detectability— that is, the amount of advance notice that the firm is likely to receive about the risk event. Advanced notice could come months, weeks, or days ahead of the event. In the case of some natural disasters, the notice could be a matter of hours or none at all. Figure 11.8 shows how risks might be charted and compared. The risks represented by the largest circles in the red zone (high likeli- hood, high impact, low detectability) clearly represent the greatest threats.

Steps 5, 6, and 7 complete the framework for creating plans to deal with the risks. Strategies include transferring the risk to another party, reducing the nega-

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 215

tive effect of the risk, avoiding the risk altogether, or accepting some or all of the consequences of a particular risk. Risk planning investments are usually of two types: (1) development of greater detection capabilities and (2) development of contingency options. In both cases, collaboration with key partners is invaluable. Suppliers and customers are important sources of advanced information regarding impending risk events, such as labor strikes, commodity shortages, and market shifts. They also can provide contingency options in terms of sources of flexible capacity, distribution channel options, and the like. Supply chain leaders incorpo- rate this kind of risk planning as a key element of their collaborative efforts. In addition, they are more likely to invest in information technologies, environmen- tal scanning, and business and governmental intelligence-gathering activities.

Professor David Closs and his colleagues at Michigan State University offer some useful ideas for managing risks (Closs et al. 2008). Though their focus in the

Figure 11.8 Portfolio of risk events

Risk

likelihood

Risk

Impact

Larger circles indicate less detectability or less

advanced notice of risk events

Low Medium High

High

Medium

Low

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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216 Diagnosing Greatness: Ten Traits of the Best Supply Chains

SCMR article is on terrorist threats and other security incidents, the framework they developed can be extended to managing risks of all types. It identifies nine key competencies, which we have broadened to form an overall risk management program:

1. Process strategy. As is the case with all such programs, strong executive commitment and a culture that elevates the importance of risk management are foundational competencies for firms seeking to effectively manage supply chain risks. Risk planning efforts need to be emphasized and adequately resourced. Importantly, risk management must be viewed as a normal part of managers’ jobs, not as an afterthought or as something that is nice to do.

2. Process management. Because risk planning activities are likely to be dis- tributed across the various supply chain organizations, a decentralized and local- ized planning approach is generally most effective. At the same time, there needs to be a central structure to communicate risk plans both vertically and horizon- tally throughout the organization. A central office should be established that defines risk planning procedures, delivers training, and develops tools and tech- nologies supporting the effort.

3. Infrastructure management. Leading companies are vigilant in assessing risk vulnerability and maintaining the security and continuity of their facilities, corporate information, inventories, and other resources. Infrastructure manage- ment insures that facilities, equipment, and transportation assets are able to with- stand security threats as well as any natural disasters such as earthquakes and weather-related events.

4. Communication management. This competency area addresses the proce- dures by which risk threats are communicated to proper authorities, employees, and supply chain partners. Channels need to be established for both top-down and bottom-up communication of risk events and prescribed responses.

5. Management technology. Management technology provides the media and information systems for actually transmitting the necessary communication to the right recipients. As Closs and his colleagues point out, information systems can provide early indications of disruptions and trends in material or information flows. Data analytics provide the power to sift through data to identify important factors in detecting and forecasting events. The information from these systems also is valuable in assessing root causes of risk events after they have occurred.

6. Process technology. Closely aligned with management technology is process technology, used to track product movements and process outputs across the sup- ply chain. This sensing capability relies on the firm’s ability to place monitoring systems at key points throughout supply and demand networks.

7. Metrics. The implementation of proper metrics helps ensure that risk assessments are carried out and that performance is improved. Metrics can be tied to compliance issues for security purposes. In the larger sense, metrics need to

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 217

track both risk avoidance and response. Further, metrics form the basis for peri- odic risk audits to be executed throughout the supply chain organization.

8. Collaboration management. The root causes of many, if not most, risks of supply chain disruption lie outside of the firm. Because of the tight interdependen- cies in most supply chains (especially lean ones), all of the partners will be affected by a calamity that occurs at any point in the chain. Collaboration efforts need to include risk planning in terms of prevention, detection, and response.

9. Public interface management. Finally, firms need to connect to relevant government agencies and other sources of risk information. They must continu- ously monitor and synthesize information generated by agencies that provide information on economic and pricing data, global political events, travel alerts, weather, and so on. Scanning over a broad set of horizons offers the best hope for early detection of risk events.

The foregoing pages describe both a specific process and an overarching pro- gram for managing risk. One of the biggest challenges to getting risk management off on the right foot is avoiding the common pitfalls that can derail the effort. We conclude this chapter with the admonitions of University of North Carolina researchers Jayashankar M. Swaminathan and Brian Tomlin, who call attention to six pitfalls to avoid:

1. Assuming disruptions can occur only when you’re operating at nor- mal strength. Supply chain disruptions don’t always hit when you’re running at peak capacity with a normal amount of buffer inven- tory. Sometimes they happen when you’re having unrelated supply problems; other times one disruption follows closely on the heels of another. The message: Be prepared for risk under varying operating scenarios.

2. Assuming your company is the only one affected by the disruption. Weather-related disruptions, port strikes, and commodity shortages all affect a wide swath of constituencies. Consider this reality in your contingency plans. Most importantly, develop strong relationships with your suppliers and logistics services providers; these will stand you in good stead during crunch time.

3. Ignoring the supply risk associated with demand-pooling tactics. Demand-pooling strategies such as postponement, flexible manu- facturing, and standardized components can help companies main- tain service levels with lower buffer inventory. The danger in this technique, however, is that it concentrates supply— and therefore risk— among fewer (flexible) manufacturing facilities.

4. Ignoring demand risk when choosing a supply-continuity tactic. Developing a continuity supply strategy cannot be done in isola-

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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218 Diagnosing Greatness: Ten Traits of the Best Supply Chains

tion— that is, without consideration of the demand risk and variabil- ity of the associated products involved.

5. Allowing the attitudes of individual managers toward risk to deter- mine strategy. No doubt, different managers within the organization will have different views of, and tolerances to, supply chain risk. To make sure everyone is on the same page, write Swaminathan and Tomlin, firms need to set an organization-wide risk-assessment and risk-management policy.

6. Building short-term resiliency at the cost of long-term vulnerability. The ability to quickly respond to risk scenarios is, of course, essen- tial. But short-term actions should always be taken with an eye toward the longer-term consequences— both positive and negative— of those actions (Swaminathan and Tomlin 2008).

aCTion sTudy: hewleTT-paCkard

How does a firm share risk with supply chain partners and execute a meaningful risk management effort? Writing in the Quarter 2/2008 issue of CSCMP Supply Chain Quarterly, HP’s Verstraete explains how his firm successfully addressed the challenge. An interesting aspect of HP’s approach was the application of tech- niques that are used in the stock and commodities markets, taking into account the uncertainties associated with introducing new products in the marketplace. Here’s a summary of how that initiative unfolded (Verstraete 2008).

For HP, uncertainty is a daily concern. Because product life cycles are short and new products are introduced frequently, it’s a challenge to know how much will be sold and consequently the amount of materials that need to be ordered. Moreover, component prices fluctuate, and availability is sometimes limited because the supplier lacks sufficient capacity. Verstraete cites one other complicat- ing factor: “Most companies sign ‘not to exceed quantity’ contracts with their sup- pliers. The actual number of items is not guaranteed, so it comes as no surprise that the supplier will include that risk in the price it charges the customer.”

HP relies on econometric modeling techniques to better understand what can happen over the life cycle of the product. “The model HP developed includes such factors as quantities of products sold, evolution of the price of the commodities, availability, and shortage of supply to figure out what kinds of scenarios could pos- sibly happen,” writes Verstraete in his article. Once the model has identified those scenarios, HP goes back to its suppliers and proposes structured contracts. Under these contracts, a fixed-quantity order is placed for a certain threshold, and a not- to-exceed quantity order is placed for the remainder.

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Trait 9: Ability to Anticipate and Manage Risk 219

Verstraete summarizes the advantages of the adopted approach: “HP’s experi- ence is that, although there might be multiple prices under the system, the average price ends up being lower than it would be with the flexible contracts. One reason is that HP is actually sharing the risk with its supplier. And if the product is even more successful than expected, HP can still turn to either the supplier or the spot market to source the additional quantities required. In doing so, the company not only fosters a collaborative relationship with its supplier but also improves its availability of supply” (Verstraete 2008).

ConClusions

Managing risk is becoming an increasingly important issue in supply chain man- agement. For some firms it will be the difference between survival and failure as their supply chains get further extended and they rely increasingly on partners in different geographical areas and cultures. Supply chain professionals are well advised to anticipate the consequences of these developments and prepare their organizations with specific risk management strategies and implementation plans.

As we have discussed in this chapter, firms can effectively use existing data to anticipate disruptions and to quantify the potential costs. Above all, the emphasis must be on being proactive and preparing for the highest priority risks with a contingency plan that can be executed quickly and effectively.

This chapter has highlighted the urgency of the risk situation and the critical need to start working on those traits that the leaders have cultivated. The frame- works and guidelines presented here can help guide that effort. Sometimes the toughest part is just getting underway. Despite the pitfalls and the difficulty of stepping up to such a formidable global challenge, risk management is one of those competencies that must be developed— and sooner rather than later!

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

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Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. J. Ross Publishing. Created from apus on 2023-07-11 11:39:11.

C op

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2 00

9. J

. R os

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hi ng

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rig ht

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