Supply Chain Risk: Is it a Problem Too Big to Solve?
Companies that are part of global supply chains find risks lurking around every corner, from tsunamis to factory fires to labor actions. Some of these risks are man-made, while others come from the natural world.
When you begin to list out all the ways that the supply of goods and services can be interrupted — from the point of origin of raw materials to the last-mile delivery to customers — the sheer magnitude of the problem is enough to send stalwart supply chain managers into states of fear, panic and denial.
At Opus, we focus on the risks that accrue from our companies’ engagement with customers and the use of third parties. We know that organizations that provide goods and services to consumers face an entire universe of risk.
This is the first of a series of blog posts in which we’ll take a look at how the people managing supply chain risk can take an approach that makes the problem less daunting. In this first post, we cover why supply chain risk has become such an enormous problem for businesses.
Is Supply Chain Risk Really that Complicated?
When talking to practitioners and academics about supply chain risk, the breadth and depth of the topic can result in hours of debate, endless expansions of the discussion scope and much hand-wringing over the futility of efforts to manage risk.
In short – supply chain risk is complicated.
Having a sound process for managing supply chain performance and risk is a must, as it gives businesses a competitive advantage. We often take note of companies that provide innovative and critical products and services. Many of these companies, like Apple, Becton, Dickinson and Company and Cisco Systems, are examples of companies that “lead with their supply chains.”
As global competition leads to thinner margins, companies are relying more on supply chain performance to satisfy and retain customers.
Sources of Supply Chain Risk
Managing supply chain risk is a priority for businesses today. In their sixth annual “Risk Barometer” report on the top ten global business risks, Allianz Global Corporate & Specialty lists business interruptions and supply chain risk as companies’ number one concern for the fifth year in a row.
There are several reasons why managing risk has, over the past decade, taken the place of cost control as the primary concern of supply chain managers.
First, supply chains have become increasingly global in nature. Products and services are being outsourced to multiple nations, resulting in the movement of goods and services across many borders. According to the United Nations Conference on Trade and Development (UNCTAD) statistics, the value of world trade (in US dollars) nearly doubled from $12.5 trillion in 2005 to $21 trillion in 2015.
Another factor is that supply chains are getting longer as a result of globalization and specialization. Specialization leads to a greater number of intermediaries and connections within the supply chain. More connections mean more places where a disruption can occur.
Finally, advances in global communications and the rise of social media have magnified the negative outcomes and increased the stakes of a supply chain interruption. Consumers know almost instantly when something in a supply chain goes wrong.
In sum, our interconnected world is making supply chains more difficult to oversee, which in turn has led to significant business exposures.
How Bad Can Supply Chain Risk Really Be?
In February 2018, KFC issued an apology to its customers in the UK by taking out a full page ad in The Sun. A change in their logistics provider and a subsequent supply chain interruption caused a failure of chicken deliveries to its stores. The scenario resulted in the closing of about 750 of the chains 900 UK stores and the loss of millions in revenue.
According to a report by the Global Supply Chain Institute from the University of Tennessee, major supply chain interruptions cause:
- A 93% loss of sales
- A decrease of 33%-40% in shareholder returns
- Increase of 13.5% in price volatility
- A decline of 107% in operating income
- A 114% reduction in Return on Assets (ROA)
Stats like these show just how devastating supply chain interruptions can be. When a trusted supplier or vendor fails, companies feel the outcome.
Check back for the next post in the series where we’ll begin to form a framework for an effective risk management approach. Want to learn more? Contact us.