The following commentary is the author’s guest blogger contribution to the Supply Chain Expert Community web site where it can also be viewed and commented upon.
Some recent Supply Chain Expert Community commentaries have cited the recently published 2012 BDO RiskFactor Report for Technology Businesses which cited a principal finding that natural disasters and other geo-political issues pose serious threats to supply chain management and operations among the top 1000 technology-oriented companies. A three year perspective of the top concerns of these companies indicates almost a doubling factor of concern in the areas of:
- Natural disasters, war, conflicts and terrorist attacks- From 55 percent concern in 2010 to 88 percent concern in 2012
- Inability to maintain operational infrastructure and systems- From 42 percent concern in 2010 to 73 percent concern in 2012
- Beaches in technology security or privacy- From 44 percent concern in 2010 to 71 percent concern in 2012
- Credit or financial risk of customers, vendors or suppliers- From 48 percent concern in 2010 to 64 percent concern in 2012
Kerry Zuber able executive at Kinaxis, in his Community commentary, questioned whether these increased concerns are actually materializing into meaningful actions. Kerry further observes that most risk mitigation activity has the negative consequence of increasing operating costs as supply chain teams attempt to balance risk mitigation with added safety stock or dual sourcing of components, causing a conundrum with the continual pressures of cost control and efficiency. This author echoes these same concerns.
But it also important for senior supply chain and business leaders to take a step back and reflect how many technology companies came into this current situation. As an industry analyst, I can recall numerous executive surveys up to 10 years ago that all identified high supply chain costs and consequent cost reduction as topping the executive agenda. We all know what resulted. Technology and other industry focused firms flocked to low-cost manufacturing regions, initially for component sourcing and consequently major value-chain sourcing. The notion that these regions were located in higher risk areas, whether that amounted to natural disaster, IP protection or security breaches, were secondary to the goals of cost reduction. While access to new and potentially lucrative new markets was an added motivation, cost reduction was the overriding initial motivator.
Here lies the conundrum for today’s supply chain leaders. C-level executives were initially tuned into the increased profiles of supply chain risk, until these risks became brutally quantified. The recent supply chain disruptive incidents of 2011 and in 2012 have been the wake-up call. Major portions of critical supply were eliminated in days and vulnerabilities of highly lean supply chains have been exposed, with the impact being direct to the bottom line. Many senior executives are still not sensitized to their supply chain profiles.
Throughout this same period, if you asked many business and supply chain executives the question, as I did, who in the organization had primary responsibility to oversee the identification and mitigation of supply chain risk, the answers tended to be vague, ranging from procurement to finance. Notice that I have not mentioned the word “accountability”, since that question is often a non-starter with today’s complex global footprints of supply chain trading partners. That seems to be changing, as well, as C-level executives now must respond to stockholder concerns relative to mitigation of future occurrences.
The point of this commentary is for executive teams to context today’s concerns of increased supply chain risks with the broader perspective that cost is, in reality, a two-edged sword. Initiatives that continue to reduce cost can all be neutralized with the direct and indirect cost of major business interruption. Such costs can exceed current insurance coverage in terms of retaining key customers or an erosion in industry competitiveness. Cost concern must also be buffered by investment in business resiliency.
Supply chain teams need the ability and executive support to invest in supply chain risk mitigation capabilities. These capabilities take on organizational, business process, inventory investment and added advanced technology dimensions. That is why the concepts of scenario based planning, advanced business intelligence, predictive analytics and supply chain control towers are gaining increased supply chain functional attention. They are an important extension of business continuity strategy and should come under the stewardship of a cross-functional, cross-business steering team tasked with the same.