New Threats to Supply Chains Call for New Approaches to Risk Management

With supply chains growing longer and more complex, the likelihood of supply chain disruption increases dramatically. Companies have new exposures in new geographic regions, and the interconnected nature of the global economy makes problems more and not less likely to arise.

In a report developed in concert with the World Economic Forum, “Building Resilience in Supply Chains,” we looked at some of the natural disasters and emerging threats that dominated headlines in 2012 and have continued to perplex managers into 2013. Just in the last 12 months, we have seen armed conflict and political upheaval in the Middle East affecting oil shipments; the closure of ports and airports in the northeastern United States due to Hurricane Sandy; and severe, prolonged drought in the U.S., leading to crop failures and the lowest levels for the Mississippi River in nearly two decades.

There are other factors at play as well. Supply chains are increasingly dependent upon the flow of information, so the rise of cyber crime poses significant threats to supply chain continuity. Concern is also growing about systematic attacks on financial institutions that could, in some circumstances, lead to an inability to make and receive payments.

Companies are finding it harder to get insurance coverage and are paying higher premiums, while financial reforms are putting pressure on banks to tighten the terms of trade finance.

These events and others have forced political and business leaders to pay attention to supply chain risk. This new focus requires an updated framework for evaluating and responding to risks. It also raises some questions: Have supply chain managers made things worse by concentrating on fewer suppliers to reduce costs? Do government security efforts under- or over-react to the issues? Have they reduced flexibility to a point where global supply chain participants are less able to respond to disruptions?

Rushing for the Same Exit

Our own analysis indicates that leading companies are increasingly addressing the probability of severe, profit-sapping risks by adopting new practices over the past two to three decades. For example, lean supply chains, by design, expose the causes of frequent failures, forcing organizations to learn how to design reliability into their processes. Globalization provides opportunities for diversification of supply, while specialized production and scale accelerate learning and the ironing-out of risks. And the greater visibility enabled by IT innovations gives advance warning of problems and supports decentralized solutions. However, morethan 80% of companies surveyed in an Accenture/MIT study expressed concern about supply chain resilience, and still only 10% are actively managing supply chain risk.

In some cases, however, these advances can amplify rather than mitigate risks. Lean supply chains are essential, but good practice dictates appropriate reserves and mitigation plans, especially for critical components. Goods which are easily replaceable or readily sourced present less of a problem.

Given trends such as globalization, lean processes and geographical concentration, organization risk profiles have changed without necessarily increasing or decreasing the risk. A large number of potential failure modes, combined with common sense and learning from failure, typically lead to a fairly high probability of minor failures, such as slight delays, and a very low probability of catastrophic failures.

Supply chains are configured so that they can deliver the maximum intended value even if there are several high probability operational type risks. However, companies should build into their mitigation plans some consideration of what other parties will do in a similar event. If everyone is rushing for the same “fire exit” it will be difficult to get out.

Our research indicates that major supply chain disruptions have been found to cut the share price of impacted companies by 7% on average.

How to Increase Supply Chain Resilience

Through our work with the World Economic Forum, including workshops and extensive dialogue with senior supply chain executives, we have identified three essential elements for increasing supply chain resilience:

1. a common risk vocabulary;
2. improved data and information sharing among supply chain participants in both private and public sectors; and
3. greater agility and flexibility built into resilience strategies.

Systemic risks have global geographic scope, cross-industry relevance, uncertainty as to how and when they will occur, and high levels of economic and/or social impact requiring responses from multiple stakeholders. These risks are also magnified by the way supply chain systems are configured. They cannot be mitigated by individual participants in the supply chain.

As the WEF report notes, risk management must be an explicit but integral part of supply chain governance. There are a number of steps that can help companies improve supply chain risk management:

• Institutionalization of a multi-stakeholder supply chain risk assessment process rooted in a broad-based and neutral international body;
• Mobilization of international standards bodies to further develop, harmonize and encourage the adoption of resilience standards;
• Provision of incentives for organizations to follow agile, adaptable strategies to improve overall resilience; and
• Expansion of the use of data sharing platforms for risk identification and responses.

In addition to these broader recommendations, the report also notes the importance of the use of exercises to stress-test assumptions and plans, and the development of trade resumption plans, protocols and lines of authority to address major concerns. Information technology is another key focus area. When configured correctly, IT can provide significant resilience gains through more sophisticated analytics; improved data and information sharing; effective scenario modeling; and establishment of pre-programmed responses.

Business continuity is enabled through access to real-time data, followed by rapid dissemination of data-driven supply chain fixes. However, information sharing infrastructures depend on a resilient core network, appropriate communication tools and an element of redundancy. This requires IT systems that are scalable, secure and re-routable.

Every company’s supply chain is different, and measures taken to build in resilience and mitigate risk will vary widely from company to company. When disruptions occur, however, companies need to have effective measures in place to prevent the loss of market share to unaffected competitors. The right supply chain structure, combined with a flexible, rapid response to situations as they arise, is absolutely essential to operating in a global market where risks abound.

Steve Culp is the global managing director of Accenture Finance and Risk Services and Jonathan Wright is a managing director in the Operations consulting group at Accenture.