Maximizing ROI on Supply Chain and Operations Risk Management

As companies seek to achieve growth in an environment where operations risk is pervasive—and where supply chain risk has become a top priority—risk management is a key consideration in designing and operating supply chains.

A recent Accenture study, based on a survey of more than 1,000 senior executives (mostly from large global companies), found that more than three out of four (76%) respondents believe supply chain risk management is important or very important. Their focus on mitigating potential risks in the supply chain is most often driven by concerns tied to cost and other pricing factors, IT security and complexity, and the unpredictable global economy within which they work.

And while most companies receive some return on investment from their risk management, our research found a small group of companies (7% of the sample) which generate impressive returns in excess of 100%.

You might wonder: Why the difference? Further analysis revealed that the 7%—the leaders—have three practices in common:

1. Leaders make supply chain risk management a priority. Excelling in any pursuit requires concerted attention to it. The leaders focus on supply chain risk management much more than other companies. In fact, 61% of leaders (compared with 37% of others) consider supply chain risk management very important—a strategic imperative for their supply chain organization—and they recognize the importance of capabilities that can enable them to gain greater visibility and predictability across their supply chains.

In our experience, several actions can help organizations embed operations risk management in such a way as to make it a top priority. Organizations can:

• Formalize risk management’s place on relevant management meeting agendas;
• Give risk management a seat among top management;
• Establish and propagate a “culture of risk management” throughout the supply chain organization;
• Develop and nurture supply chain risk management skills as part of employees’ standard job descriptions;
• Build and deploy the analytical tools that can help the organization respond to risks.

2. Leaders centralize responsibility for the risk management function. Forty-three percent of leaders, versus 32% of others, said they have a central risk management function—led by a C-level or vice president-level executive—that oversees all risk management activities. In our experience, such a centralized risk management function can be a major asset: It enables a company to plan and react to risks in a more coordinated and efficient manner. However, that doesn’t mean there’s a “blanket” approach to supply chain risk management. It is important to establish some corporate-level guidelines for risk management to provide a base level of consistency in how the enterprise as a whole approaches it.

But once the overall risk management approach and methodology are defined at the corporate level, a company should consider its supply chain structure and risk profile as it operationalizes its supply chain risk management. This approach can enable a company to strike an appropriate balance between centralized control and ownership close to the relevant organizational functions—a major factor in being able to quickly and effectively identify and respond to risks.

For instance, corporate decision-makers at a Japanese automaker determined that the most effective approach to risk management was to defer responsibility for addressing risk to the regional level because that’s how its operations were organized. This philosophy served the automaker well during the tsunami event in 2011 as it allowed the company to focus its response on the area of the enterprise most affected by the disaster—its Asian operations.

3. Leaders invest aggressively in key operations risk management capabilities, with a specific focus on end-to-end supply chain visibility and analytics. The leaders tend to support their risk management organization with significant investments in key capabilities. For example, they are nearly three times as likely as other companies to plan to boost their investment in supply chain risk management by 20% or more in the next two years, while a majority of non-leaders anticipated an increase of less than 20% over their current investment. Furthermore, leaders are far more likely to expect to duplicate that track record. Nearly seven in 10 leaders, compared with just 4% of others, expect to generate a return of at least 100% on their supply chain risk management investment in the next two years.

We have found that some of the most important risk management capabilities in which companies can invest are those that can provide greater visibility into operations. Such capabilities—which include supply chain control towers or demand forecasting factories—enable companies to collect and analyze rich data across the supply chain so they can identify developments that could affect their operations and mobilize to respond when necessary.

With risk being such a significant concern, companies need to identify the approach to operations risk management that is most appropriate to their business. In our view, that typically means first defining the overall strategy for managing risk at the corporate level, and then determining the degree to which the company should centralize or decentralize risk management execution based on the structure, risk profile and business needs.

Regardless of the approach taken, visibility is vital. Companies should consider investing in capabilities that enable them to effectively monitor their supply chain in real time so they can identify potential threats and proactively respond before they become real problems irrespective of where they are in the supply chain.

Mark H. Pearson is the global managing director of Accenture Strategy’s Operations practice. Pearson, who has more than 26 years of experience working for Accenture, focuses on helping clients develop dynamic supply chain and service operations capabilities to more rapidly respond to changing customer demands and market opportunities as they occur. He has first class honors degrees in business administration and German from Aston University, Birmingham, United Kingdom. He is based in Munich, Germany.