Supply Chain Disruption

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2 Supply Chain Risk Management The As- Is Landscape

In.this.chapter.we.provide.an.overview.of.the.growth.of.supply.chain.risk. management. (SCRM). during. the. last. few. years. and. provide. additional. insight. into. who. is. talking. about. SCRM,. what. they. are. saying,. and. the. tone.of.the.dialogue..We.will.provide.a.summarized.view.of.SCRM.top- ics,.announcements,.articles,.reports,.and.survey.results.that.help.define. the. state. of. SCRM. today.. We. will. also. share. a. perspective. on. SCRM. through.a.different.prism:.the.Four.Pillars.of.SCRM..We.will.then.provide. a.maturity.level.for.each.pillar..The.chapter.concludes.with.discussion.of. SCRM.adoption.

a ChROnOlOgy Of Supply Chain RiSk ManageMent

Let’s.start.by.providing.a.sense.of.the.growth.of.SCRM.in.terms.of.aware- ness,. discussions,. articles,. papers,. surveys,. solutions,. tools,. and. more.. During. our. research. for. this. book. we. compiled. hundreds. of. reference. works. in. order. to. provide. a. comprehensive,. end-.to-.end. perspective. of. SCRM.. Using. these. reference. works. and. our. experience,. we. have. com- piled.a.chronology.of.the.growth.we’ve.witnessed.and.the.tone.and.tenor. of.the.dialogue.

While.many.risk.management.studies.and.surveys.were.conducted.dur- ing.2000–2010,.our.focus.starts.with.the.latter.part.of.that.decade..Most. supply. chain. executives. became. interested. in. SCRM. after. the. financial. meltdown.of.2008..Company.after.company.watched,.almost.helplessly,.as.

Schlegel, Gregory L., and Robert J. Trent. Supply Chain Risk Management : An Emerging Discipline, Taylor & Francis Group, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1680353. Created from apus on 2021-06-09 03:04:31.

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26 • Supply Chain Risk Management: An Emerging Discipline

customer. orders. were. canceled,. suppliers. entered. bankruptcy,. and. com- modity. markets. became. increasingly. volatile.. For. many,. 2008. was. the. genesis.of.their.risk.management.efforts.

2009

Most.operations.management.and.supply.chain.management.profession- als. are. familiar. with. the. International. Organization. for. Standardization. (ISO).Group.and.its.set.of.standards.that.revolve.around.quality.control. and.process.reliability,.such.as.ISO.9000..In.2009,.the.ISO.Group.delivered. its.first.set.of.standards.directly.relating.to.supply.chain.risk,.which.was. a.major.recognition.of.the.importance.of.SCRM..These.standards.include. ISO. 73. and. ISO. 31000.. ISO. 73. profiles. the. vocabulary. and. taxonomy. of. risk.within.the.supply.chain,.and.ISO.31000.provides.insight.into.the.prin- ciples,.practices,.and.guidelines.to.effectively.identify,.assess,.mitigate,.and. manage.supply.chain.risk.

A.key.report.during.this.period.was.Accenture’s.2009.Managing Risk for High Performance in Extraordinary Times.1This.global.report,.which.sur- veyed.260.CFOs,.chief.risk.officers,.and.other.executives.across.21.coun- tries,.came.right.after.the.2008.financial.meltdown..This.report.explored. the.details.of.what.was.going.on.around.the.globe.relative.to.risk.and.its. impact. on. businesses. and. supply. chains.. It. was. one. of. the. first. compre- hensive. analyses. of. the. cause. and. effects. of. risk. to. global. supply. chains.. This. report. revealed. that. 85%. of. executive. respondents. said. their. com- pany.needed.to.overhaul.its.approach.to.risk.management;.40%.said.their. companies.already.had.increased.or.would.increase.their.investments.in. broader.risk.management.capabilities;.41%.stated.their.risk.management. costs. increased. by. at. least. 25%. over. a. three-.year. period;. and. only. 27%. said.their.risk.management.function.was.involved,.to.any.great.extent,.in. objective.setting.and.performance.management.

Accenture. concluded. that. steps. needed. to. be. taken. to. manage. supply. chain.risk.to.protect.a.company’s.competitive.advantage,.reputation.and. branding,. and. credit. ratings;. to. maintain. positive. comments. by. ana- lysts;.and.to.ensure.access.to.capital.over.time.at.a.reduced.cost..Overall,. Accenture.reported.that.many.companies.had.a.long.way.to.go.before.they. should.feel.comfortable.about.their.company’s.state.of.risk.management.

AMR.released.a.report.on.risk.in.U.S..manufacturing.to.get.a.sense.of. how.businesses.feel.about.the.future.and.what.they.saw.in.terms.of.risk..The. top. three. concerns. of. U.S.. manufacturers. were. supplier. quality. failures,.

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Supply Chain Risk Management: The As-Is Landscape • 27

commodity. price. volatility,. and. intellectual. property. infringement.. In. particular,.supplier.solvency.was.a.key.concern..Furthermore,.respondents. said.that.doing.business.with.Chinese.suppliers.was.contributing.the.most. to.overall.risk,.scoring.the.highest.in.11.out.of.15.risk.categories.evaluated.

2010

In.2010,.we.began.a.course.for.a.master’s.of.business.administration.degree. by.explicitly.profiling.the.emerging.elements.of.supply.chain.risk.manage- ment.. The. initial. courseware. was. made. up. of. articles,. survey. outcomes,. reports.from.the.insurance.industry,.and.the.basics.of.good.risk.manage- ment.. As. the. course. grew. in. maturity,. a. Supply. Chain. Risk. Assessment. Tool.emerged.that.codified.the.effects.of.supply.chain.maturity.as.it.relates. to.mitigating.risk..The.basic.premise.was.that.as.the.supply.chain.matures,. the.inherent.risks.faced.by.that.supply.chain.diminish.

The.Supply.Chain.Risk.Assessment.Tool,.featured.in.Figure 2.1,.encom- passes.about.100.questions-.of-.discovery.about.a.company’s.supply.chain. across.10.tenets.of.the.entire.supply.chain..It.is.a.perception-.based.tool.that. captures.the.complexion.of.a.company’s.operating.environment.relative.to. a.maturity.model.and.then.develops.an.inherent.risk.factor.for.every.tenet.. Risk.factors.are.then.plotted.inside.a.spider.diagram.for.visual.presenta- tion.using.a.red,.yellow,.and.green.designation..There.will.be.more.discus- sion.about.this.tool.later.in.the.book.

Risk Gradient Low Risk 1 to 4

Medium Risk 5 to 7

High Risk 8 to 10

Heat Map Color Key

Leadership 10.00 8.00 6.00 4.00 2.00 0.00 1.00 3.00 5.00 7.00 9.00

Balanced Scorecard

S&OP Processes

Information Systems

Integrated Supply Chain

Customer Demand

SCRM Risk “Heat Map” Assessment

Industry

Manufacturing

Supply

Logistics

figuRe 2.1 Tools:.supply.chain.risk.assessment.

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28 • Supply Chain Risk Management: An Emerging Discipline

During.2010,.the.Massachusetts.Institute.of.Technology.(MIT).Center. for.Transportation.and.Logistics.produced.its.preliminary.findings.from. the.Global.Supply.Chain.Risk.Management.research.project..The.survey. collected. 1,400. usable. responses. from. companies. in. 70. countries.. The. project’s. primary. goal. was. to. understand. if. regional. and. cultural. differ- ences.affect.how.people.think.about.and.manage.supply.chain.risks..This. survey.was.a.seminal.point.in.the.birth.of.SCRM..The.final.report.covers. differences.in.attitudes.about.risk,.differences.in.risk.frequencies.(internal. and. external. events). and. priorities,. and. differences. in. practices. across. countries.and.industries.2.It.is.one.of.the.few.reports.that.approached.risk. from.a.cross-.cultural.perspective.

The. MIT. report. concluded. that. respondents. showed. a. marked. prefer- ence. for. risk. prevention. as. opposed. to. planning. and. response,. but. that. was.influenced.by.national.culture..Furthermore,.most.respondents.indi- cated. that. risk. planning. and. prevention. should. be. carried. out. centrally. in.an.organization,.while.actual.responses.to.most.risk.events.should.be. managed. locally.. Respondents. were. also. asked. to. rank. the. top. supply. chain.disruptions.for.which.their.company.should.prepare..A.breakdown. in.supply.quality,.supplier.financial.failures,.and.internal.process.failures. topped.the.list.

Aberdeen. Group. also. produced. a. comprehensive. report. on. SCRM.. Their. findings. further. supported. the. notion. that. SCRM. is. evolving. as. a. concept.3. One. of. the. key. findings. from. this. study. was. an. analysis. of. the.reasons.behind.pursuing.an.aggressive.risk.management.agenda..The. top.reasons.include.protecting.the.organization.and.its.brand,.safeguard- ing. against. an. unpredictable. global. economic. environment,. a. corporate. mandate. to. institutionalize/.improve. risk. management,. complying. with. new. and. changing. regulations,. and. maintaining. and. improving. share- holder.value.

And. what. did. the. Chief. Procurement. Officers. (CPOs). plan. to. do. to. manage. risk. according. to. Aberdeen?. The. CPOs. expected. to. develop. clearly. defined. metrics. for. supply. performance. and. risk,. develop. con- tingency. plans. for. supply. disruptions,. use. external. information. services. to. monitor. and. assess. supply. risk,. and. define. ownership. of. risk. within. the.organization.

This.groundbreaking.report.was.one.of.the.first.times.a.research.orga- nization. put. together. a. comprehensive. profile. in. an. effort. to. codify. the. elements.of.a.good.SCRM.journey..Figure 2.2.illustrates.the.actions.items,. capabilities,.tools,.and.techniques.that.will.help.ensure.success.within.the.

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Supply Chain Risk Management: The As-Is Landscape • 29

risk.management.arena..The.bulk.of.Aberdeen’s.findings.about.and.jour- ney.toward.good.SCRM.hold.true.today.

Also.in.2010.PRTM.(now.part.of.PricewaterhouseCoopers).released.its. Global Supply Chain Trends Report.4. A. few. of. the. novel. themes. emanat- ing.from.this.study.were.that.almost.75%.of.all.the.respondents.believed. that. demand. and. supply. volatility. will. become. the. biggest. roadblock. to. capturing. profits. in. the. economic. upturn,. and. more. than. 80%. expected. complexity.in.their.supply.chains.to.increase.dramatically,.partly.due.to. an. increase. in. product. proliferation.. The. PRTM. study. produced. several. important.takeaways:

•. Demand.and.supply.volatility.is.here.to.stay. •. Supply.chain.complexity.will.be.with.us.for.many.years. •. End-.to-.end. supply. chain. cost. optimization. will. be. critical. mov-

ing.forward. •. Risk. and. opportunity. management. should. span. the. entire. supply.

chain,.including.with.key.partners.

This. research. concluded,. and. this. has. certainly. been. borne. out. by. subsequent. experience,. that. supply. chains. will. become. more. volatile.

Pressures Actions – Protect the organization and its brand/ competitive advantage – Unpredictable global economic environment

Aberdeen Group CPO Survey Report & SCRM Report 2010

– Implement processes aligning risk management with compliance/governance – Develop supply risk mitigation strategies – Build risk aware culture throughout the organization

– Standard risk management policies and procedures across the enterprise – Management accountability for risk management activities within overall governance framework – Transparency in communication of risk information (i.e., policies including escalation criteria, procedures, practices & thresholds) – Risk information integrated into core decision-making (i.e., strategic planning capital allocation and performance management)

– Enterprise Risk Management (ERM) platform/software – Enterprise governance, risk, and compliance (GRC) platform/Software – Event management (triggers/alerts) – Query & reporting tools – Enterprise BI platforms – Heat maps/dashboards/ balanced scorecard tools re�ecting risk – Predictive analytics/process modeling tools for measuring and monitoring risk

Capabilities Enablers

figuRe 2.2 Best-.in-.class.SCRM.framework.

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30 • Supply Chain Risk Management: An Emerging Discipline

and. complex.. The. researchers. also. concluded. that. most. companies. are. ill-.prepared.to.manage.this.complexity.and.that.risk.management.will.be. a.critical.success.factor.affecting.corporate.success.

We.also.saw.two.more.reports.explicitly.targeting.supply.chain.disrup- tions. and. their. financial. impacts.. Chainlink. Research. and. Hendrick. &. Singhai.had.been.working.on.attempting.to.codify.the.financial.impacts. of.supply.chain.disruptions.on.company.bottom.lines..According.to.these. resources,. a. publicly. traded. company. that. experiences. a. moderate. to. severe.supply.disruption.should.expect.to.realize.a.107%.drop.in.operating. income.on.average,.114%.drop.in.return.on.sales,.93%.drop.in.return.on. assets,.7%.lower.sales.growth,.11%.growth.in.cost,.14%.growth.in.inven- tories,. and. a. 10%. reduction. in. shareholder. value.. This. is. one. of. the. first. reports.that.linked.risk.events.to.tangible.performance.shortfalls.

Finally,. a. report. from. the. Business. Continuity. Institute. (BCI). in. the. United.Kingdom.revealed.serious.levels.of.supply.chain.failures.and.dis- ruptions. around. the. globe.. This. study. found. that. weather. disruptions. affected.more.than.half.of.all.companies.in.2010,.up.from.29%.the.previ- ous.year..Unplanned.IT.and.telecommunication.outages.were.second.on. the. list. of. most. frequent. disruptions.. More. than. one. third. of. companies. mentioned.service.failures.by.outsourcer.providers,.up.from.20%.the.pre- vious.year..More.than.50%.of.the.respondents.stated.that.their.disruptions. led.to.a.loss.of.productivity.and.20%.of.the.respondents.admitted.they.had. suffered.damage.to.their.brand.or.reputation.as.a.result.of.a.disruption.

The.report.concluded.that.the.serious.levels.of.supply.chain.disruption. experienced. by. organizations. around. the. globe,. coupled. with. the. wide. range.of.threats,.underscores.the.business.case.for.investment.in.business. continuity.planning.(BCP)..We.will.go.into.more.detail.later.about.BCP.. For.now,.consider.BCP.to.be.an.internal.insurance.policy.or.risk.response. plan.that.identifies,.assesses,.mitigates,.and.manages.risk.scenarios.

2011

During. 2011. Accenture. began. to. talk. about. the. “new. normal”. of. global. supply.chains..The.new.normal.featured.more.global.sourcing.and.manu- facturing,. hyper-.demand. requirements,. longer. supply. chain. lead. times,. more.potential.points.of.failure,.and.managing.supply.chains.in.far-.flung. corners.of.the.world.5.With.these.elements.of.supply.chain.risk.coming.to. the.surface,.Accenture.produced.a.set.of.principles.that.support.the.birth.

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Supply Chain Risk Management: The As-Is Landscape • 31

of. supply. chain. risk. management. as. a. discipline.. These. six. principles. include.the.following:

. 1.. Integrate.risk.management.practices.across.all.business.functions.to. ensure.understanding,.commitment,.and.alignment

. 2.. Identify,.measure,.and.prioritize.risks.by.mapping.out.the.complete. supply.chain.“ecosystem”

. 3.. Emphasize. operational. flexibility,. global. visibility,. and. diversified. supplier.portfolio.to.blunt.the.impact.of.supply.chain.calamities

. 4.. Use. probability. modeling. to. identify. unknown. risks. and. develop. contingency.plans

. 5.. Insist. that. suppliers. and. business. partners. perform. up-.front. due. diligence

. 6.. Hedge.risk.by.making.prudent.choices.about.insurance

We.will.dig.deeper.into.every.one.of.the.six.tenets.throughout.the.book. AMR. surveyed. more. than. 500. executives. worldwide. during. 2011. and.

asked.questions.about.supply.chain.risks,.disruptions,.effects.of.those.dis- ruptions,.and.methods.to.mitigate.and.manage.risk..Supply.failures.were. the. most. cited. disruption. noted. by. executives.. Quality. failures,. natural. disasters,. and. commodity. price. volatility. were. also. cited. by. almost. one. third. of. respondents.. In. terms. of. the. most. common. risk. management. approaches,.executives.said.they.relied.on.(in.order.of.mention).meetings/. discussions.with.external.partners.and.suppliers,.predictive.analytic.tools,. staying.current.with.supplier.business.continuity.plans,.utilizing.reports/. data.from.third-.party.sources,.and.utilizing.performance.risk.dashboards.

In.October.2011.SCM.World,.the.global.institute.for.supply.chain.learn- ing,.training,.and.development.at.Stanford.University,.released.its.annual. Chief Supply Chain Officer.(CSCO).study.6.The.survey.involved.750.global. executives.of.which.over.50%.were.vice.presidents.or.higher..The.report.was. conducted. during. the. immediate. aftermath. of. the. Japanese. earthquake. and. tsunami,. creating. an. interest. in. understanding. how. supply. chains. were.reacting.to.these.disruptions..The.report.highlighted.the.disruptions. due.to.the.tragic.events,.how.many.companies.had.suffered.shortages.in. supply. and. capacity,. lost. sales,. inventory. write-.offs,. and. plant. closures. across. many. industries.. Even. though. the. report. didn’t. examine. supply. chain. risk. specifically,. it. did. talk. at. length. about. how. the. supply. chain. is.a.critical.success.factor.and.a.driving.force.for.competitive.advantage..

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32 • Supply Chain Risk Management: An Emerging Discipline

Another.key.theme.throughout.the.report.was.that.supply.chain.sustain- ability.is.critical.in.terms.of.driving.value.for.the.corporation,.especially. in.times.of.demand.and.supply.volatility.

During.this.period.we.also.picked.up.on.definitions.of.a.resilient.supply. chain.from.the.Supply.Chain.Council.7.While.the.Supply.Chain.Council. was. updating. its. SCOR. Model. and. risk. definitions. and. frameworks,. the. importance.of.resiliency.in.the.supply.chain.came.to.the.surface..Essentially,. the.council.concluded.that.in.a.world.of.technical.change,.financial.risk,. political.turbulence,.and.mounting.regulatory.pressures,.industry.growth. does. not. always. proceed. smoothly.. Risk. management. is. especially. chal- lenging. when. threats. are. unpredictable. At. the. same. time,. corporations. are.accepting.broader.responsibility.for.social.and.environmental.impacts. of.their.supply.chains..A.resilient.enterprise.has.the.capacity.to.overcome. disruptions.and.continually.transform.itself.to.meet.the.changing.needs. and.expectations.of.its.customers,.shareholders,.and.other.stakeholders.

2012

Another.study.by.the.Business.Continuity.Institute.addressed.the.impact. of.the.Great.East.Japan.earthquake.and.Christchurch.earthquake.in.New. Zealand..The.key.take-.away.from.this.research.was.the.wide-.ranging.dif- ferences. in. an. important. SCRM. metric,. time-.to-.recovery.. BCI. assessed. how. long. it. took. supply. chains. to. recover. from. the. impact. of. the. earth- quakes..The.compelling.statistic.is.that.almost.50%.of.all.the.respondents. needed.more.than.five.weeks.to.recover.

Aberdeen. Group. released. a. report. on. risk. from. a. financial. perspec- tive.8.Coming.off.the.heels.of.the.Japanese.disasters,.the.report.attempted. to. understand. the. risk-.adjusted. strategies. actually. operating. inside. the. CFO’s.office..The.report.concluded.that.whether.a.company.is.looking.to. reroute. a. supply. source. away. from. a. natural. disaster. or. seeking. to. miti- gate.the.risk.associated.with.tax.audit.exposure,.it.is.clear.that.companies. with. processes. and. tools. that. enable. clear. visibility. to. risk. entities. and. a. means.to.react.quickly.are.going.to.be.the.ones.that.hold.the.key.to.effec- tive.budgeting.and.profitability.

Zurich,.one.of.the.largest.insurers.in.the.world,.published.a.set.of.sup- ply.chain.risk.statistics.and.some.revealing.numbers.associated.with.supply. chain.business.interruptions.9.The.insurer.released.a.report.that.profiled. the. causes. behind. supply. chain. disruptions. derived. from. an. analysis. of.

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Supply Chain Risk Management: The As-Is Landscape • 33

insurance.claims.over.a.several-.year.period..Clearly,.this.analysis.addressed. primarily.hazard.risk..The.insurer.found.that.85%.of.organizations.expe- rienced.at.least.one.supply.chain.incident.that.caused.disruption.to.their. business.. More. than. 50%. of. supply. chain. disruptions. occur. because. of. adverse.weather,.and.just.over.40%.occur.because.of.unplanned.IT.or.tele- com. outages.. Other. significant. disruptions. occurred. because. of. loss. of. talent/.skills,. product. quality. incidents,. civil. unrest/.conflicts,. and. cyber- attacks..Of.the.disruptions.that.occurred,.nearly.40%.originated.below.the. tier-.one.supplier.level.

A.research.article.titled.Researcher’s Perspectives on Supply Chain Risk Management presented.a.study.of.the.diversity.of.perspectives.surround- ing.supply.chain.risk.management.10.This.study.identified.three.gaps.in.the. body.of.knowledge:

•. Definition gap—there. is. no. clear. consensus. on. the. definition. of. SCRM. because. many. limit. the. scope. of. SCRM. to. rare. but. large. events,. while. others. believe. that. SCRM. is. about. supply–.demand. uncertainties..(Hopefully,.the.definitions.we.presented.in.Chapter 1. help.to.clarify.this.term.)

•. Process gap—there. is. a. lack. of. research. on. an. important. aspect. of. the.risk.management.process,.namely,.the.response.to.supply.chain. risk.incidents.

•. Methodology gap—there.is.a.shortage.of.empirical.research.in.the. area.of.SCRM.

During. this. period. an. important. study. on. supply. chain. risk. was. con- cluded.by.Deloitte.and.Forbes.Insights..This.survey.covered.192.U.S..exec- utives,.CEOs,.CFOs,.SVPs,.and.directors.across.multiple.industries..One. finding.that.stands.out.from.this.work.is.that.91%.of.respondents.said.they. planned. to. reorganize. and. reprioritize. their. approaches. to. risk. manage- ment.during.the.subsequent.three.years.

A. disconcerting. aspect. of. this. survey. was. the. completely. scattered. approach. toward. risk. responsibility.. Fully. one. quarter. of. respondents. indicated.the.CEO.is.primarily.accountable.for.risk.management;.almost. a.quarter.said.the.said.the.CFO/.treasurer’s.office.is.primarily.responsible;. almost. 20%. said. the. chief. risk. officer/.treasurer. is. responsible;. and. fewer. than.15%.said.legal/.compliance.is.responsible..The.remaining.respondents. were. spread. across. various. other. groups.. Future. risk. management. plans.

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34 • Supply Chain Risk Management: An Emerging Discipline

include. more. than. half. of. respondents. saying. their. company. planned. to. elevate. risk. management. within. their. organization,. while. almost. 40%. said.they.will.reorganize.to.support.enterprise.risk.management.(ERM),.a. framework.introduced.in.Chapter 1..Almost.40%.of.respondents.said.they. will.provide.more.staff.training,.while.almost.one.third.planned.to.incor- porate.more.technology.into.their.risk.management.efforts.

And. finally,. SCM. World,. which. we. referenced. previously,. released. its. annual.Chief Supply Chain Officer.report..This.report.surveyed.more.than. twice.the.number.of.companies.as.in.2011.and.explored.five.main.topics,. one.of.which.was.risk.management..A.novel.aspect.of.this.survey.involved. SCM.World.asking.respondents.what.they.were.doing.to.identify,.assess,. mitigate,. and. manage. risk. and. profiled. the. impact. of. risk. events. from. both. demand. and. supply. disruptions.. From. this. study. we. learned. that. the.highest.impact.from.supply.and.demand.disruptions.over.a.two-.year. period.was.a.loss.of.sales/.revenue..In.order.of.impact,.subsequent.impacts. included.lower.profits,.delays.in.product.launches.and.growth.plans,.loss. of. customers,. higher. cost. of. capital,. damage. to. image. and. reputation,. and.lower.share.price/.shareholder.value..This.research.revealed.the.many. damaging.effects.of.supply.and.demand.disruptions.

2013

The.start.of.2013.featured.the.release.of.a.report.from.the.World.Economic. Forum. (WEF). in. Davos,. Switzerland.. The. sponsors. of. the. report. were. Zurich.Insurance,.Accenture,.Partners.against.Corruption.(PACI),.and.the. World. Economic. Forum.. The. report,. titled. Building Resilience in Supply Chains,. was. an. outcome. of. WEF’s. initial. Supply. Chain. Risk. Initiative. started.in.2011..A.clear.finding.in.this.report.is.the.need.for.organizations. to. shift. from. reactive. to. proactive. risk. management.. Another. relevant. finding.is.that.more.than.80%.of.companies.are.now.concerned.about.sup- ply.chain.resilience..Study. participants.also. indicated.there. is.a.need.for. a.common.risk.vocabulary.and.that.cyber.risk.may.have.the.greatest.risk. implications.for.supply.chains.

The. World. Economic. Forum’s. report. touched. on. what. it. will. take. to. make. SCRM. a. bona. fide. business. discipline.. Perhaps. most. importantly,. risk. management. must. become. an. explicit. and. integral. part. of. supply. chain. governance.. Other. high-.level. suggestions. for. moving. SCRM. to. a. business.discipline.include.the.following:

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•. Institute. a. multistakeholder. supply. chain. risk. assessment. process. across.the.enterprise

•. Mobilize. international. standards’. bodies. to. further. develop. resil- ience.standards

•. Incentivize.corporations.to.follow.agile,.adaptable.supply.chain.strategies •. Expand. the. use. of. data-.sharing. platforms. for. risk. identification.

and.responses

A. RIMS.org. article. mentioned. the. Risk. Maturity. Index. developed. by. AON.Insurance.and.the.Wharton.School.of.Business..The.index.suggests. that. companies. with. the. highest. level. of. risk. maturity. (a. measure. that. gauges.the.development.of.an.organization’s.risk.strategy.and.framework). experience. 50%. lower. stock. price. volatility. than. less-.developed. counter- parts.. Over. a. two-.year. period. (2010–2012). companies. with. higher. risk. maturity. ratings. saw. greater. annual. stock. price. returns.. This. was. espe- cially. apparent. when. the. only. companies. to. see. positive. returns. during. that.volatile.period.were.those.with.the.highest.risk.maturity.levels..Those. lower.on.the.maturity.scale.saw.losses.between.17%.and.30%..This.work. again.pointed.out.the.critical.relationship.between.risk.management.and. financial.outcomes.

Lloyd’s. of. London. released. several. statistics. in. 2013. associated. with. the.Japanese.earthquake.and.tsunami.and.Thailand.floods..The.first.sta- tistic. they. shared. was. the. combined. property. and. business. interruption. losses,.which.reached.a.record-.breaking.$240.billion,.with.just.$47.billion. of.the.losses.covered.by.insurance..The.insurance.industry.provides.sup- ply. chain. interruption. products. called. contingent. business. interruption. (CBI).. However,a. large. majority. of. companies. impacted. only. had. asset-. based.property.damage.insurance..Some.of.the.elements.covered.by.CBI. include. getting. workers. in. and. out. of. damaged. facilities,. working. to. get. power.to.facilities,.and.shipping.and.receiving.goods.into.and.out.of.facili- ties..Chapter 5.will.reexamine.the.floods.in.Thailand.from.a.risk.quanti- fication.perspective.

An. interesting. report. from. the. Association. of. Insurance. and. Risk. Managers. in. Industry. and. Commerce. (AIRMIC). titled. Supply Chain Failures: A Study of the Nature, Causes, and Complexity of Supply Chain Disruptions,. identified. seven. underlying. factors. that. tend. to. be. present. whenever.supply.chains.go.wrong:.off-.shoring,.increasing.complexity,.cost. pressures,.geographic.clustering,.modern.communications,.modern.pro- duction. methods,. and. increasing. dependency.. The. report. also. estimated.

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36 • Supply Chain Risk Management: An Emerging Discipline

that.economic.losses.from.supply.chain.disruptions.have.increased.465%. between.2009.and.2011.

And.finally,.Ernst.&.Young.interviewed.more.than.420.CFOs.and.heads. of. supply. chains. at. technology,. automotive,. manufacturing,. aerospace,. and.defense.companies..The.report.concluded.that.when.CFOs.and.supply. chain.leaders.form.a.closer.business.partnership.within.a.company,.they. report.better.results.in.a.number.of.areas,.including.the.company’s.finan- cial.position..The.study.found,.for.example,.that.70%.of.CFOs.and.63%.of. supply. chain. executives. said. their. relationship. had. become.more. collab- orative.over.the.past.three.years..The.merger.between.finance.and.supply. and.supply.chain.professionals.appears.to.be.an.inevitable.one.

The.intriguing.outcome.from.this.survey.is,.because.CFOs.take.a.long-. term. approach. to. formulating. business. strategy,. they. are. in. a. unique. position.to.manage.risk.and.plan.for.business.continuity,.something.that. challenges.supply.chain.managers.who.tend.to.think.in.terms.of.shorter. time. horizons..The.CFO.also.has.the.opportunity. to.work. with.the.pro- curement. and. treasury. groups. to. determine. the. extent. to. which. risk. is. owned.and.managed.by.the.company.and.the.extent.to.which.it.is.pushed. down.through.the.supply.chain.

In. 2013. the. authors. of. this. book. published. several. articles. on. SCRM.. One.key.article.was.SCRM: The New Discipline of Supply Chain Excellence. After.several.years.of.teaching.in.the.classroom.and.conducting.workshops. around.the.globe,.we.became.thoroughly.convinced.of.the.need.for.SCRM. to.become.a.discipline..The.article.identified.what.was.emerging.from.the. classroom.and.from.the.practical.application.of.the.body.of.knowledge.in. the.field..This.article.was.a.major.impetus.for.this.book.

fOuR pillaRS Of Supply Chain RiSk ManageMent

We.would.like.to.finish.up.our.“as-.is”.discussion.by.providing.an.assess- ment.of.the.state.of.supply.chain.risk.management..This.will.involve.some- thing.we.call.the.Four.Pillars.of.SCRM..These.pillars.include.supply.risk,. process. risk,. demand. risk,. and. environmental. risk.. Each. pillar. encom- passes.its.own.set.of.tools,.techniques,.tactics,.metrics,.people,.processes,. and.program.issues..The.complexion.of.each.pillar.is.below.

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Supply Risk

The. complexion. of. this. pillar. encompasses. areas. such. as. supplier. conti- nuity,. strategic. sourcing,. supplier. viability. and. capability,. raw. material. pricing,. supplier. assessments,. inbound. logistics,. fraud,. corruption,. and. counterfeiting..Inherent.risks.here.are.disruptions.caused.by.the.inability. of. suppliers. to. deliver. on. time,. quality. failure,. financial. failure,. compli- ance.failure,.channel.complexity,.and.communication.failure.

process Risk

This. pillar. includes. IT. systems,. mergers. and. acquisitions,. marketing. strategy,.organizational.structure,.frameworks.and.metrics,.supply.chain. strategy. and. execution,. manufacturing. and. quality,. organizational. risk. assessment,. heat. maps,. and. war. rooms.. The. inherent. risks. here. include. disruptions.caused.by.quality.problems,.inventory.shortages,.late.deliver- ies,. capacity. shortages,. equipment. breakdowns,. IT. outages,. poor. overall. execution,.and.misalignment.of.strategy.and.metrics.

demand Risk

The.complexion.of.this.pillar.covers.areas.such.as.new.customers,.market. trends,. consumer. interest/.spending,. demand. management/.forecasting,. distribution. requirements. planning,. product. integrity,. customer. service,. and.scenario.planning..Inherent.risks.here.are.disruptions.caused.by.prob- lems. in. distribution,. actions. by. competitors,. product. reputation,. brand. management,.social.media/.trending,.logistics,.and.customer.sentiment.

environmental Risk

This.final.pillar.encompasses.areas.such.as.government.regulations,.taxes,. economic. volatility,. currency. exchange,. natural. disasters,. and. compli- ance.. Inherent. risks. are. natural. disasters,. geopolitical. and. energy. risks,. port.security,.logistics.and.facilities.security,.currency.exchange.fluctua- tions,.global.economics,.war,.pandemics,.and.civil.disobedience.

We. have. compiled. a. profile. of. the. maturity. and. activity. level. for. each. pillar..Figure 2.3.depicts.our.assessment.of.the.maturity.and.activity.level.

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38 • Supply Chain Risk Management: An Emerging Discipline

for.each.pillar..On.the.left.or.y-.axis.is.the.maturity.level.of.each.pillar..The. horizontal. x-.axis. depicts. the. Four. Pillars,. and. the. size. or. length. of. each. “box”.is.an.indication.of.the.activity.level.within.each.pillar.

From.a.maturity.point.of.view,.we.feel.the.supply.pillar.is.by.far.the.most. mature.of.the.four,.positioned.at.about.70.out.of.100..Why?.Procurement. professionals. have. been. dealing. with. supplier. uncertainty. and. risk. for. more.than.50 years..This.discipline.has.become.a.profession,.supported.by. member-.driven.organizations.who.are.providing.certifications.to.demon- strate.that.these.professionals.have.a.command.of.the.body.of.knowledge. and.best.practices..Tools.such.as.supplier.relationship.management.(SRM),. spend.management,.credit.and.financial.reporting.by.public.credit.orga- nizations,.and.more.have.matured.over.the.years..And.the.present.activ- ity.level.of.new.techniques.such.as.supplier.risk.assessment;.supply.chain. mapping;.and.fraud,.bribery,.and.corruption.identification.supported.by. new. cloud-.based. software. systems. is. providing. the. procurement. profes- sionals.with.a.host.of.new.tools.and.techniques.to.leverage.in.an.effort.to. identify,.assess,.mitigate,.and.manage.supplier.risk.

The. next-.highest. level. of. maturity. and. activity,. in. our. opinion,. is. the. demand. pillar.. Positioned. at. about. 50. out. of. 100,. demand. management. solutions,. such. as. sales. forecasting. and. many. other. deterministic. tools. have.been.around.as.long.as.the.supply.tools..So.why.then.do.we.feel.this.

100 100 100 100

100

120

Supply Process Demand Environment

M at

ur ity

In de

�e di�erence between the top & bottom of each box indicates the scope of activity

figuRe 2.3 Four-.pillar.SCRM.maturity.and.activity.level.

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Supply Chain Risk Management: The As-Is Landscape • 39

pillar.is.at.a.lower.maturity.level.than.supply?.The.tools.utilized.in.this.pil- lar.have.been.developed.to.support.processes.that.are.purely.forward.look- ing. and. one-.dimensional,. such. as. sales. forecasting,. and. do. not. involve. any.element.of.uncertainty.or.risk..Another.tool,.collaborative.planning,. forecasting,. and. replenishment. (CPFR),. does. provide. some. coverage. of. risk.because.it.attempts.to.support.information.sharing.between.supplier. and. customer. in. an. effort. to. minimize. demand. surprises. and. shocks. to. the. supply. chain.. New. techniques. and. tools. such. as. probabilistic. plan- ning,. discrete-.event. simulation,. and. digital. modeling. are. emerging. to. assist.demand.managers.and.sales.and.operations.planning.(S&OP).pro- cess. owners. to. run. “what-.if ”. scenarios. that. will. demonstrate. how. their. supply.chains.will.act.when.a.risk.event.shocks.their.organization..These. new. tools. overtly. handle. uncertainty. and. risk. and. will. take. some. time. to.mature.

Next.in.the.maturity.and.activity.level.is.the.process.pillar..A.tremen- dous. number. of. tools. and. techniques. support. all. the. processes. we’ve. highlighted.in.this.pillar..Many.have.been.around.for.more.than.40 years. and.are.supported.by.professional.organizations.such.as.APICS,.CSCMP,. ASQC,. ISSSP,. and. others. and. also. include. professional. certifications.. Again,.our.reasoning.for.the.pillar’s.positioning.is.that.many.of.the.tools. do.not.embrace.uncertainty.and.risk..They.support.discrete,.linear.func- tions,.such.as.planning.inventory,.planning.capacity,.production.schedul- ing,.quality,.logistics,.and.more..These.functions.are.driven.by.solid.supply. chain. management. metrics. such. as. maximizing. service,. reducing. cost,. and.improving.asset.utilization,.not.mitigating.risk.

And. finally,. the. environmental. pillar. is. very. new. and. continues. to. expand.because.of.new.industry-.specific.and.governmental.rules.and.reg- ulations..There.is.more.and.more.activity.in.this.area,.but.with.new.and. ever-.changing.regulations,.this.pillar.will.take.a.long.time.to.solidify.

the Supply Chain RiSk ManageMent adOptiOn

We’ll. finish. this. chapter. with. a. brief. discussion. on. what. we. call. SCRM. Adoption.. This. utilizes. a. categorization. scheme. revolving. around. lag- gards,.industry.average,.and.early.adopters..We.want.to.leave.you.with.a. sense.of.the.operational.complexion.for.each.category.in.terms.of.SCRM. along.with.a.few.salient.statistics.from.the.early.adopter.companies.

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40 • Supply Chain Risk Management: An Emerging Discipline

SCRM adoption

We.know.that.leading-.edge.companies.are.much.more.likely.to.integrate. and. align. risk. with. corporate. goals.. They. generally. have. more. visibility. into. their. organization. as. they. are. substantially. more. likely. to. perform. “what-.if ”. scenario-.planning. and. change. analysis.. On. average,. leaders. achieve.almost.95%.better.accuracy.of.cash.flow.forecasts,.which.is.clearly. better.than.what.their.peers.achieve..And.they.tend.to.mitigate.their.finan- cial.losses.down.to.3%.of.revenue.as.opposed.to.their.peers,.who.average. 10%. of. revenue. due. to. financial. loss.. What. characterizes. early. adopters,. industry.average,.and.laggards?

Early Adopter Companies.. Early. adopters. leverage. their. ERM. tools. and.technology.to.enhance.the.integration.of.risk.management.across.the. business.. They. continually. link. risk. management. to. company. goals. and. compensation..And,.they.are.improving.visibility.and.monitoring.of.Key. Risk.Indicators.with.new.business.analytic.tools.

Early.adopters.also.implement.processes.that.are.aligned.with.risk.man- agement. and. compliance,. build. a. risk. awareness. culture. throughout. the. organization,.and.secure.executive.commitment.for.risk.management.ini- tiatives..These.practices.are.being.driven.by.the.early.adopters.by.a.factor. of.two-.or.three-.to-.one.above.the.industry.average.and.laggard.companies.

Other.attributes.characterize.early.adopters..These.companies.maintain.a. senior.management.champion.of.risk,.segment.risk.duties,.cross-..functionally. coordinate.risk.management,.establish.roles.and.responsibilities.to.execute. risk,. and. establish. a. risk. committee. to. oversee. key. risks.. These. commit- ments.by.early.adopters.eclipse.the.industry.average.and.laggards.again.by. a.factor.of.two-.or.three-.to-.one.

Industry Average Companies. Average.companies.attempt.a.standard- ized. approach. to. communication. and. organizational. collaboration. rela- tive.to.risk..Some.of.these.companies.are.beginning.to.integrate.and.align. risk. with. corporate. goals.. Some. are. also. developing. and. measuring. risk. and.performance..Several.are.beginning.to.improve.the.time-.to-.decision. by.optimizing.risk.knowledge.management.activities.and.expanding.risk. visibility.throughout.the.organization..Senior.management.oversight.and. engagement.associated.with.risk.to.improve.executive.buy-.in.is.starting.to. occur.at.this.level.

Laggard Companies. Laggards.talk.about.supply.chain.risk.but.do.not. fund. projects. to. prepare. for. and. respond. to. risk. events. at. any. real. level.. Most. have. someone. in. the. CFO’s. office. reviewing. enterprise. risk. in. the.

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Supply Chain Risk Management: The As-Is Landscape • 41

classical.financial.terms,.such.as.hazard,.financial,.and.strategic.risk..The. average.operational.and.supply.chain.professional.does.not.maintain.sce- nario.game.plans.for.risk.events;.therefore,.SCRM.is.an.event-.driven,.ad. hoc,. or. part-.time. experience.. Most. executives. in. this. category. assume. incorrectly.that.their.people.will.know.what.to.do.in.a.risk.event.

Figure 2.4.depicts.a.graph.encompassing.laggards,.industry.average,.and. early.adopter.companies.in.terms.of.the.adoption.rate.of.SCRM.concepts.. In.terms.of.the.as-.is.state,.it.is.safe.to.conclude.that.a.majority.of.compa- nies.are.still.considered.laggards.in.terms.of.their.SCRM.capabilities..This. suggests.that.we.have.more.work.to.do.to.move.companies.away.from.the. laggard.status..Subsequent.chapters.will.concentrate.on.how.to.do.that.

COnCluding thOughtS

The.purpose.of.this.chapter.is.to.help.us.understand.the.current.state.of. supply.chain.risk.management..From.our.analysis.we.can.reach.some.over- arching.conclusions..First,.the.negative.outcomes.from.supply.chain.risk. events.are.often.quite.severe..Only.a.fool.would.believe.otherwise..Second,. no. consensus. exists. among. companies. or. industries. concerning. how. to. organize. for. or. manage. supply. chain. risks.. The. ways. that. companies. approach.SCRM.are.varied..Third,.most.companies.are.ill-.prepared.from.

Laggards, 70% of Sample Size

Average, 20% of Sample Size

Early Adopters, 10% of Sample Size

0.5

1.5

2.5

3.5

0 0.5 1 1.5 2 2.5 3 3.5

M at

ur it

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ve l –

L ow

to H

ig h

Adoption Rate – Low to High

figuRe 2.4 SCRM.adoption.

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42 • Supply Chain Risk Management: An Emerging Discipline

an.employee,.measurement,.organizational,.and.IT.perspective.to.operate. in.an.environment.characterized.by.increased.uncertainty.and.volatility.

Another.major.conclusion.is.that.most.companies.recognize.the.threat. of.supply.chain.uncertainty.and.understand.that.operating.in.a.condition. called.the.“new.normal”.will.not.be.as.enjoyable.as.operating.in.the.“old. normal.”.A.study.by.Zurich.Insurance,.for.example,.reported.that.75%.of. respondents. state. they. still. do. not. have. full. visibility. into. their. supplier. base..This.is.concerning.because.several.studies.have.concluded.that.sup- ply.disruptions.are.the.most.widely.cited.supply.chain.risk.event.

Finally,.most.SCRM.efforts.rely.on.heroics.rather.than.planning.and.pre- vention.. In. terms. of. SCRM. maturity,. most. companies. are. considered. lag- gards.with.some.movement.toward.average..Minimal.proactive.supply.chain. risk.management.appears.to.be.occurring..Growth.along.the.maturity.curve. needs. to. accelerate,. especially. when. we. consider. that. almost. 75%. of. risk. managers.believe.that.supply.chain.risk.levels.are.higher.than.just.a.few.years. ago.and.that.risk.will.continue.to.increase..More.than.70%.of.risk.manag- ers. say. the. financial. impact. of. supply. chain. disruptions. has. also. increased. compared.with.just.a.few.years.ago.11.As.a.sign.of.the.times,.the.Allianz.Risk. Barometer.in.2013.ranked.for.the.first.time.ever.business.interruption.and. supply.chain.risks.as.the.top.concerns.of.businesses.globally..One.of.the.main. objectives.of.this.book.is.to.prepare.us.to.manage.in.this.“new.(ab)normal.”

Summary of key points

•. Most.supply.chain.executives.became.interested.in.SCRM.after.the. financial.meltdown.of.2008..For.many,.2008.was.the.genesis.of.their. risk.management.efforts.

•. In. 2009,. the. ISO. Group. delivered. its. first. set. of. standards. directly. relating. to. supply. chain. risk,. which. was. a. major. recognition. of. the. importance.of.SCRM..These.standards.include.ISO.73.and.ISO.31000.

•. The. Supply. Chain. Risk. Assessment. Tool encompasses. about. 100. questions-.of-.discovery. about. a. company’s. supply. chain. across. 10.tenets.covering.the.entire.supply.chain..The.basic.premise.is.that. as.the.supply.chain.matures,.the.inherent.risks.faced.by.that.supply. chain.diminish.

•. The.new.normal.of.global.supply.chains.features.more.global.sourc- ing.and.manufacturing,.hyper-.demand.requirements,.longer.supply. chain. lead. times,. more. potential. points. of. failure,. and. managing. supply.chains.in.far-.flung.corners.of.the.world.

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•. Over.a.period.of.several.years,.Zurich.found.that.85%.of.organiza- tions.experienced.at.least.one.supply.chain.incident.that.caused.dis- ruption.to.their.business.

•. The. Risk. Maturity. Index. suggests. that. companies. with. the. highest. level. of. risk. maturity. experience. 50%. lower. stock. price. volatility. than.less-.developed.counterparts.

•. The.Four.Pillars.of.SCRM.are.supply.risk,.process.risk,.demand.risk,. and.environmental.risk..The.supply.pillar.is.by.far.the.most.mature. of. the. four. because. procurement. professionals. have. been. dealing. with. supplier. uncertainty. and. risk. for. over. 50 years.. The. demand. pillar.ranks.second.in.terms.of.maturity,.followed.by.the.process.pil- lar.and.finally.the.environmental.pillar.

•. SCRM.Adoption.utilizes.a.categorization.scheme.revolving.around. laggards,.industry.average,.and.early.adopters..In.terms.of.the.as-.is. state,.it.is.safe.to.conclude.that.a.majority.of.companies.are.still.con- sidered.laggards.in.terms.of.their.SCRM.capabilities.

endnOteS

. 1.. “Managing. Risk. for. High. Performance. in. Extraordinary. Times.”. Accenture 2009 Global Management Study. 2009.

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