Risk Management – A Strategic Management Task (Part 2)
riskmethods welcomes a guest post from Dr. Hugo Eckseler, procurement and supply chain management consultant and former Executive Vice President at Deutsche Post DHL.
The topic of my first article dealt with increasing globalization and interconnection of the global economy, and the resultant requirements for modern supply chain risk management.
Supply Chain Risks
My second contribution aims to describe typical supply chain risks that a company may be subjected to. To systematically determine such risks it is helpful to take the various risk areas into account.
The first priority here for most purchasing agents is the insolvency of a key supplier and, as a result, supply shortfalls. Companies that procure finished goods or production materials from foreign currency countries to a large extent may be affected by currency fluctuations, which may impact significantly – positively as well as negatively – on the material costs.
Volatility of supply markets
Availability of strategic raw materials and rare earths have caused much concern for many companies over the last years, as has the price volatility of steel, copper, energy and other production materials.
The list of events that could lead to serious risks in the supply chain ranges from earthquakes, tsunamis, hurricanes, floods right up to major fires and health epidemics. After the Fukushima catastrophe, Toyota production lines stood still in Japan for two months.
Political developments such as the “Arab Spring” in North Africa or the current situation in the Ukraine can impact on entire economies. OMV, for instance, reported recently that oil production in Libya was interrupted due to local protest action.
Non-compliance with social and ecological standards
Child labor, non-adherence to health and safety regulations and environmental standards can have catastrophic consequences for the local, directly affected community. The collapse of a textile company in Bangladesh, resulting in more than 1000 fatalities is only one recent example. Corporate social responsibility encompasses early recognition and prevention of such risks.
Typical operational risks are capacity bottlenecks on the supplier’s side, lack of quality, downtime of critical machines, systems and IT centers, as well as transport problems that can impact seriously on just-in-time or just-in-sequence production processes. (The image shows the “Mol Comfort” container ship that broke apart in the Indian Ocean, caught fire and sank).
In the World Economic Forum Supply Chain and Transport Risk Survey, participants nominated their top 10 triggers of global supply chain disruptions. The figures provide an interesting insight but it goes without saying that the individual risk exposure differs by company, industry, regional spread and other factors. In order to assess the likelihood and impact of risks for your own company, knowledge of sensitive aspects of production, logistics, research and development and other departments is essential. External advice from experts can be extremely helpful to quickly establish “hot spots” and develop an efficient and effective risk strategy.
Converting the strategy into continuous, operational risk management and handling the associated flood of data is only possible with appropriate software tools that support purchasing agents in determining, filtering and analyzing risk data. More about this in my next, third article.
Read more “Risk Management – a Strategic Management Task”: Part 1 | Part 3