Focusing on cost and efficiency at the expense of risk reduction? You may be damaging your bottom line and competitive edge
Written by Kelvin Harris
Supply chains today are both complex and global and, for many, regularly disrupted, often opaque, and increasingly regulated. Coupled with the megatrends of accelerating urbanization, resource scarcity, and the breathtaking pace of technology disruption, supply chains continue to rapidly evolve and transform, yet most companies understand neither the resilience of their supply chains nor the inherent risks they contain.
In 2013, PwC and the MIT Forum for Supply Chain Innovation conducted a global supply chain and risk management survey to study the supply chain operations and risk management approaches of 209 companies with global footprints. Many globally operating organizations are exposed to high-risk scenarios ranging from controllable risks—such as raw-materials price fluctuations, currency fluctuations, market changes, and fuel price volatility—to uncontrollable risks such as natural disasters.
The study findings: 1) indicate that 60 percent of companies pay scant attention to risk reduction processes and 2) validate five major observations whereby companies could better manage risk challenges to their supply chains and prepare for future opportunities.
- Supply chain disruptions have a significant impact on company business and financial performance; the average estimated loss in market cap of a Fortune 500 company from reported supply chain disruptions is $3.2 billion, according to the World Economic Forum;
- Companies with mature supply chain and risk management capabilities are more resilient to supply chain disruptions, sustaining less impact and recovering faster than companies with immature capabilities;
- Mature companies that invest in supply chain flexibility are more resilient to disruptions than are mature companies that don’t;
- Mature companies that invest in risk segmentation are more resilient to disruptions than are mature companies that don’t;
- Companies with mature capabilities in supply chain resilience and risk management do better in all surveyed dimensions of operational and financial performance than immature companies do.
Yet, despite those tenets, many supply chain efforts and initiatives continue focusing solely on efficiency and cost, with too few companies trying to understand the resulting increase in risk or the impact on supply chain resilience. A microcosm of the phenomenon can be seen through a simple examination of how people performing in such functions as procurement or network operations get rewarded and recognized: most are compensated for driving down costs or improving efficiency; very few are directly measured against objectives that include components related to risk or resilience.
Some companies have taken the first steps in their journey toward understanding and developing strong relationships across their supply chains—typically focusing on tier-one suppliers. However, even once those relationships are in place, many don’t have a strong focus on resilience. For example, PwC’s 2013 study with the Business Continuity Institute indicated that 90 percent of companies are unable to confirm that all key suppliers have business continuity plans, 75 percent experience at least one major supply chain disruption annually, and 42 percent experience a disruption below tier one.
The push toward supply chain transparency continues to be reinforced by regulations—including the National Defense Authorization Act, Dodd-Frank Section 1502 on Conflict Minerals, and the Food Safety Modernization Act—that are gradually forcing certain sectors and companies to understand what, how, who, and where their supply chains are.
Companies should not, however, wait for regulation before establishing their supply chain risk and resilience initiatives. Companies focused on integrated supply chain resilience react to adverse events faster than the competition; they take market share, and they outperform, resulting in an average 7 percent higher stock performance, based on PwC and World Economic Forum analysis. A resilient supply chain is therefore a competitive advantage.
So, how should companies respond? They must answer a number of questions such as:
- What are the causes of supply chain complexity and how have they changed recently?
- What are the sources of supply chain risk and resilience issues?
- How are vulnerability and exposure to high-impact supply chain disruptions assessed and managed properly?
- How can supply chain resilience be improved?
- What supply chain operations and risk principles would guide improvement of bottom lines in operations and financial performance?
Increasing resilience and preventing the cost and revenue impacts of disruptions affect the spectrum of supply chain risks—product, supplier, network, and social/environmental—as does demand chain and back-office technology. But it’s not just about playing defense. It’s also about playing offense: gaining competitive advantage by shaping a resilience strategy for sustained performance—but one that remains agile and fundamentally operations focused. It’s about balance.
Research accuracy can be debated, but fundamental trends are clear: companies with mature risk processes perform better operationally and financially—something CEOs and CFOs must note. Indeed, managing supply chain risk is good for all parts of the business: product design, development, operations, and sales. Companies should understand and evaluate how to improve their ability to respond to risks, increase their supply chain resilience, and increase their maturity to gain competitive advantage.
First and foremost, supply chain resilience is about being prepared, which means knowing who will do what in the moment that matters. When the disruption happens—when component A or supplier Z becomes unable to deliver—the sales team knows what to do, the manufacturing teams switch to the backup plan, alternative suppliers get activated, and customer service teams communicate to customers. Above all, customer relationships get strengthened rather than weakened.
