Risk Management in the Supply Chain – Part 3: Controlling Risks
In order to control risks on a sustainable basis, you need integrated risk management along the supply chain in your company. In the first two articles of our series I provided you with an overview on the following topics: Identification of risks and assessment of the impact. Together, this information lays the foundation for introducing appropriate preventive actions – which takes us to the last part: today’s blog article on the topic of “Controlling risks” aims to provide you with the last missing tool for successful implementation of supply chain risk management.
To “control risks” I recommend good preparation and a three-step process:
1) Collection of preventive actions
In the first instance, a preventive action inventory should be compiled and described. This contains all risk prevention or crisis response measures, sorted by topic in the same way as the risk causes (e.g. natural hazards, strikes). A responsible person must be defined for each action plan, and all involved stakeholders (e.g. from the logistics, quality, legal, corporate communication departments etc.) must be listed. In addition, it is useful to describe the actual course of events as well as concrete recommendations for implementation or support (e.g. suitable emergency logistics specialists, semiconductor brokers,…) for every action plan.
2) Identification of the extent of damage
3) Effect and derivation of measures
In the last step, a decision must be made as regards correct handling of the risk in question. Depending on how critical/non-critical the situation is, measures with the appropriate effect must be derived: that is, risk prevention, risk transfer, risk reduction or risk acceptance.
Using the example of “production plant of supplier is located in an area with a high risk of earthquakes”, the scenario is as follows:
a) The impact is low. The risk of an earthquake hitting the supplier or location of the supplier can be taken or accepted.
b) The impact is high. The following measures can be derived, for example:
- Risk prevention measures, e.g. establishing an alternative source
- Risk-transferring measures, e.g. taking out CBI insurance
- Risk reduction measures, e.g. measures for earthquake protection on factory level
To ensure long-term success, support on the part of top level management is indispensable. Resources as well as budgets must be available for implementing preventive and reactive activities. In many companies the focus is more on pure supplier development, however. Joint supplier development and risk management is the obvious way to go. Leica Camera is building on the existing supplier development, for instance. “The establishment of supply chain risk management and the inclusion of action plans in our supplier development activities help us reduce risks in the global supply chains and represent a decisive factor for maintaining a competitive edge,” confirms Marco Rücker, Procurement Team Manager at Leica.
The increase in added value by suppliers, and the associated increased dependency and increased threat of global risks make a rethink in Purchasing necessary. The goals of the purchasing department as regards availability, price and quality must be extended to include the risk factor. This is best achieved by incorporating risk management in the agreement on objectives and by introducing a central risk manager role within the purchasing organization. That certainly poses a challenge for the purchasing department – but it also brings with it an opportunity to become a key strategic partner in terms of corporate success.
I hope that by means of these guidelines I have been able to convey the opportunities provided to your company by suitable risk management. Please feel free to use our comments area to share your experiences surrounding this topic with us and other readers.
All German-speaking readers can find the entire “Controlling risks” article, which appeared in the December issue of “Beschaffung aktuell” here.