Supply Chain Disruption Gets (too) Personal
The headline from this article really caught my eye -“Hyundai Motor replaces China chief after supply disruption.” That is quite a headline. Perhaps a seminal moment for those of us in procurement and supply chain. It’s the first time that I’ve seen an executive terminated explicitly because of a supply chain disruption from a single supplier.
I work with enterprises of all shapes and sizes and am often confronted with the challenge of building a business case for further investment in supply chain risk. Notably, this challenge doesn’t usually surface for those organizations that have felt and analyzed previous disruptions; they’ve already come to the conclusion that they can and should be better.
Putting aside that existing investments are almost universally limited in scope, ad-hoc in approach and highly ineffective, the challenge of the business case for proactive investment in supply chain risk remains as organizations truly struggle with how to invest their scarce resources in this time of rapid change.
Being a solution provider, it is challenging to convert a risk management non-believer. Unfortunately, the self-evident, hard ROI that those in procurement and supply chain have grown accustomed to in the form of hard dollar savings on the price of an item is not as easily calculated with risk management.
For risk, the business case requires a bit more work to understand the broader ecosystem of the enterprise and an analysis of the potential impacts to the BUSINESS. This means that the BUSINESS in business case is critical and one can’t equate business case to a simple ROI calculation. Regardless of this difference in approach, the evidence is overwhelming. Let’s explore the elements that typically go into a risk management business case.
First there are many drivers or forces, which have put the organization into greater peril such as outsourcing, customer demands for agility, JIT/lean processes and the reality that more events happen today than ever. The mandate to act is at an all-time high, and the risk imperative is clear.
Next up, let’s tackle the dollars and cents ROI. Typically, the calculation uses time savings of reduced manual research and cost savings from buying content in bundles as the basis for cost savings. These are straight-forward and relatively uncontroversial. Then we get to the big numbers, which happen to be the more controversial ones as well. For instance, the financial savings if you find out about an event sooner or the savings if you are able to prevent or mitigate some specific risk scenario altogether. And things can get even a bit more nebulous when you consider topics such as the financial impact of protecting your brand.
In addition to these elements of the business case, there are additional forces from the market compelling you to enact. Amongst these forces are peer pressure as your competitors seek to outmaneuver you and use risk to their advantage, as well as industry analysts and consultants clearly articulating risk as an integral part of your job.
Which brings us to the more personal aspects of the opportunity to harness risk for advantage. For those motivated by carrots, there is an opportunity to be a change-agent and thought-leader within your organization, building skills that will benefit you now and in the future. For those who are stick motivated, you don’t want to be the one who is unable to answer the question from your boss on why you didn’t know that your supplier had a strike at their plant (or fill in your favorite story).
Our customers who are probably what would be considered early adopters have an interesting take on the making the business case for risk management. Here are 3 representative examples
- “Save the savings” – If in the right hand you focus on cost minimization, but then don’t protect the company, it’s like throwing out all the savings in the left hand
- “Satisfying our customers was a big driver for the initiative.” ROI for risk mitigation – It’s not like sourcing. Production has to continue, the organization wants to feel protected and have peace of mind. The BC was not ultimately a dollar-based decision
- “Risk management is part of running the business” – It’s like compliance and is needed for business continuity. Comparison to old cost was easy enough to make the ROI a non-issue
That’s a short summary of the motivators, drivers and business case strategies that are typically employed.
Getting back to the headline. It changes the nature of the imperative from one that is primarily a business imperative to one that has the potential for unfortunate personal implications. The implication being that It is unequivocally your job to build a more resilient supply chain and ensure proactive management on an ongoing basis. In the end, the inference from this headline is shirk this responsibility at your own peril.
If you want to read more on this topic, I highly suggest this paper from SpendMatter’s Peter Smith on five supply chain risk mistakes that could cost you your job.