Risk Management

Identify Vulnerabilities

Supply chains are only as strong as their weakest links – that’s an easy truth. Finding where the weak links are and taking steps to mitigate risks before they turn into losses – that’s harder. You can’t plan during a crisis, you can only plan ahead of a crisis. One way to start is by creating a two dimensional grid. Across the top, identify the “disruptors”:

• Weather
• Disasters – natural or man-made
• Political instability
• War
• Terrorism
• Economic or business changes

Working down, identify each link in your supply chain and all critical categories of supplies. Consider indirect spending categories as well as tracing sources for what your company might manufacture or distribute. A few examples to start a list:

• Outsourced components
• Raw materials – for your company and its suppliers
• Energy or fuel
• Transportation and logistics
• IT and communication

To really benefit from this kind of analysis you will need a comprehensive understanding of the supply chain for all critical ingredients and packaging materials your company requires. This means tracing your suppliers’ raw materials to their source with the assistance of your purchasing organization.

If your list is comprehensive and your information good you can simply consider each box in the grid to highlight your most vulnerable links. Using the grid systematically might unearth weaknesses in unexpected areas, as well.

Develop a Supply Chain Risk Management Plan

The best way to anticipate disruptions is to create a cross- functional team comprised of purchasing, manufacturing, research and development, marketing and quality personnel to create options for dealing with the vulnerabilities. If you realize that alternative materials or designs might have to be put in place, a testing program will likely be required to ensure that the integrity of the final product is not compromised. This team will have to buy the alternate supply sources and specifications you’ve designed.

This emergency action plan includes the following:

• Comprehensive documentation of the supply market including potential suppliers, their capacities and their capacity utilization
• An analysis of the supply chain down to the basic raw materials to understand vulnerabilities
• Critical review of specifications to understand how changes may be incorporated
• A detailed implementation plan

Interestingly, the thought process associated with building an emergency action plan may have some serendipitous beneficial consequences. By reviewing supplier relationships, you will gain in-depth knowledge of these companies, their capabilities and their relationship with their own suppliers. You will also acquire a more complete understanding of your specifications and how you can achieve the desired finished product.

Case Study

In the food industry, it is common to link the risks of bad weather with price. However, the 2002 growing season presented a more complicated challenge for users of high quality flour from the United States and Canada. It began as acreage across North America was curtailed because wheat prices had been low. Then drought affected most of the continent’s growing areas, resulting in sharply reduced yields. Of course, this resulted in a sharp upward price movement. Those with active hedging programs avoided most of the price increase, which amounted to 30% to 40% at the peak of the market.

However, that is not the whole story. North American users are accustomed to the highest quality wheat grown in the world, and many user flour specifications call for #1 grade or a blend of #1 and #2-grade wheat. Bad weather conditions limited the supply of top-grade wheat. Not only was the total supply limited, the small amount of top grade that was available sold at a very high premium. Bakers had to substitute #3 grade until the 2003 crop became available. Bakers with no contingency plans had to determine whether they could maintain the quality and integrity of their product using the lower quality flour available. In some cases they had to reformulate recipes or test and use new processes to achieve the desired finished product.

Clearly the time to develop such contingency recipes is before a supply crisis, when there is time to work them out methodically without unnecessary overtime or external costs.