30 • Supply Chain Risk Management: An Emerging Discipline
and complex. e researchers also concluded that most companies are
ill- prepared to manage this complexity and that risk management will be
a critical success factor aecting corporate success.
We also saw two more reports explicitly targeting supply chain disrup-
tions and their nancial impacts. Chainlink Research and Hendrick &
Singhai had been working on attempting to codify the nancial impacts
of supply chain disruptions on company bottom lines. According to these
resources, a publicly traded company that experiences a moderate to
severe supply disruption should expect to realize a 107% drop in operating
income on average, 114% drop in return on sales, 93% drop in return on
assets, 7% lower sales growth, 11% growth in cost, 14% growth in inven-
tories, and a 10% reduction in shareholder value. is is one of the rst
reports that linked risk events to tangible performance shortfalls.
Finally, a report from the Business Continuity Institute (BCI) in the
United Kingdom revealed serious levels of supply chain failures and dis-
ruptions around the globe. is study found that weather disruptions
aected more than half of all companies in 2010, up from 29% the previ-
ous year. Unplanned IT and telecommunication outages were second on
the list of most frequent disruptions. More than one third of companies
mentioned service failures by outsourcer providers, up from 20% the pre-
vious year. More than 50% of the respondents stated that their disruptions
led to a loss of productivity and 20% of the respondents admitted they had
suered damage to their brand or reputation as a result of a disruption.
e report concluded that the serious levels of supply chain disruption
experienced by organizations around the globe, coupled with the wide
range of threats, underscores the business case for investment in business
continuity planning (BCP). We will go into more detail later about BCP.
For now, consider BCP to be an internal insurance policy or risk response
plan that identies, assesses, mitigates, and manages risk scenarios.
2011
During 2011 Accenture began to talk about the “new normal” of global
supply chains. e new normal featured more global sourcing and manu-
facturing, hyper- demand requirements, longer supply chain lead times,
more potential points of failure, and managing supply chains in far- ung
corners of the world.
5
With these elements of supply chain risk coming to
the surface, Accenture produced a set of principles that support the birth
Supply Chain Risk Management: e As-Is Landscape • 31
of supply chain risk management as a discipline. ese six principles
include the following:
1. Integrate risk management practices across all business functions to
ensure understanding, commitment, and alignment
2. Identify, measure, and prioritize risks by mapping out the complete
supply chain “ecosystem”
3. Emphasize operational exibility, global visibility, and diversied
supplier portfolio to blunt the impact of supply chain calamities
4. Use probability modeling to identify unknown risks and develop
contingency plans
5. Insist that suppliers and business partners perform up- front due
diligence
6. Hedge risk by making prudent choices about insurance
We will dig deeper into every one of the six tenets throughout the book.
AMR surveyed more than 500 executives worldwide during 2011 and
asked questions about supply chain risks, disruptions, eects of those dis-
ruptions, and methods to mitigate and manage risk. Supply failures were
the most cited disruption noted by executives. Quality failures, natural
disasters, and commodity price volatility were also cited by almost one
third of respondents. In terms of the most common risk management
approaches, executives said they relied on (in order of mention) meetings/
discussions with external partners and suppliers, predictive analytic tools,
staying current with supplier business continuity plans, utilizing reports/
data from third- party sources, and utilizing performance risk dashboards.
In October 2011 SCM World, the global institute for supply chain learn-
ing, training, and development at Stanford University, released its annual
Chief Supply Chain Ocer (CSCO) study.
6
e survey involved 750 global
executives of which over 50% were vice presidents or higher. e report was
conducted during the immediate aermath of the Japanese earthquake
and tsunami, creating an interest in understanding how supply chains
were reacting to these disruptions. e report highlighted the disruptions
due to the tragic events, how many companies had suered shortages in
supply and capacity, lost sales, inventory write- os, and plant closures
across many industries. Even though the report didn’t examine supply
chain risk specically, it did talk at length about how the supply chain
is a critical success factor and a driving force for competitive advantage.
32 • Supply Chain Risk Management: An Emerging Discipline
Another key theme throughout the report was that supply chain sustain-
ability is critical in terms of driving value for the corporation, especially
in times of demand and supply volatility.
During this period we also picked up on denitions of a resilient supply
chain from the Supply Chain Council.
7
While the Supply Chain Council
was updating its SCOR Model and risk denitions and frameworks, the
importance of resiliency in the supply chain came to the surface. Essentially,
the council concluded that in a world of technical change, nancial risk,
political turbulence, and mounting regulatory pressures, industry growth
does not always proceed smoothly. Risk management is especially chal-
lenging when threats are unpredictable. At the same time, corporations
are accepting broader responsibility for social and environmental impacts
of their supply chains. A resilient enterprise has the capacity to overcome
disruptions and continually transform itself to meet the changing needs
and expectations of its customers, shareholders, and other stakeholders.
2012
Another study by the Business Continuity Institute addressed the impact
of the Great East Japan earthquake and Christchurch earthquake in New
Zealand. e key take- away from this research was the wide- ranging dif-
ferences in an important SCRM metric, time- to- recovery. BCI assessed
how long it took supply chains to recover from the impact of the earth-
quakes. e compelling statistic is that almost 50% of all the respondents
needed more than ve weeks to recover.
Aberdeen Group released a report on risk from a nancial perspec-
tive.
8
Coming o the heels of the Japanese disasters, the report attempted
to understand the risk- adjusted strategies actually operating inside the
CFO’s oce. e report concluded that whether a company is looking to
reroute a supply source away from a natural disaster or seeking to miti-
gate the risk associated with tax audit exposure, it is clear that companies
with processes and tools that enable clear visibility to risk entities and a
means to react quickly are going to be the ones that hold the key to eec-
tive budgeting and protability.
Zurich, one of the largest insurers in the world, published a set of sup-
ply chain risk statistics and some revealing numbers associated with supply
chain business interruptions.
9
e insurer released a report that proled
the causes behind supply chain disruptions derived from an analysis of
Supply Chain Risk Management: e As-Is Landscape • 33
insurance claims over a several- year period. Clearly, this analysis addressed
primarily hazard risk. e insurer found that 85% of organizations expe-
rienced at least one supply chain incident that caused disruption to their
business. More than 50% of supply chain disruptions occur because of
adverse weather, and just over 40% occur because of unplanned IT or tele-
com outages. Other signicant disruptions occurred because of loss of
talent/ skills, product quality incidents, civil unrest/ conicts, and cyber-
attacks. Of the disruptions that occurred, nearly 40% originated below the
tier- one supplier level.
A research article titled Researcher’s Perspectives on Supply Chain Risk
Management presented a study of the diversity of perspectives surround-
ing supply chain risk management.
10
is study identied three gaps in the
body of knowledge:
• Denition gap—there is no clear consensus on the denition of
SCRM because many limit the scope of SCRM to rare but large
events, while others believe that SCRM is about supply– demand
uncertainties. (Hopefully, the denitions we presented in Chapter1
help to clarify this term.)
• Process gap—there is a lack of research on an important aspect of
the risk management process, namely, the response to supply chain
risk incidents.
• Methodology gap—there is a shortage of empirical research in the
area of SCRM.
During this period an important study on supply chain risk was con-
cluded by Deloitte and Forbes Insights. is survey covered 192 U.S. exec-
utives, CEOs, CFOs, SVPs, and directors across multiple industries. One
nding that stands out from this work is that 91% of respondents said they
planned to reorganize and reprioritize their approaches to risk manage-
ment during the subsequent three years.
A disconcerting aspect of this survey was the completely scattered
approach toward risk responsibility. Fully one quarter of respondents
indicated the CEO is primarily accountable for risk management; almost
a quarter said the said the CFO/ treasurer’s oce is primarily responsible;
almost 20% said the chief risk ocer/ treasurer is responsible; and fewer
than 15% said legal/ compliance is responsible. e remaining respondents
were spread across various other groups. Future risk management plans
34 • Supply Chain Risk Management: An Emerging Discipline
include more than half of respondents saying their company planned to
elevate risk management within their organization, while almost 40%
said they will reorganize to support enterprise risk management (ERM), a
framework introduced in Chapter1. Almost 40% of respondents said they
will provide more sta training, while almost one third planned to incor-
porate more technology into their risk management eorts.
And nally, SCM World, which we referenced previously, released its
annual Chief Supply Chain Ocer report. is report surveyed more than
twice the number of companies as in 2011 and explored ve main topics,
one of which was risk management. A novel aspect of this survey involved
SCM World asking respondents what they were doing to identify, assess,
mitigate, and manage risk and proled the impact of risk events from
both demand and supply disruptions. From this study we learned that
the highest impact from supply and demand disruptions over a two- year
period was a loss of sales/ revenue. In order of impact, subsequent impacts
included lower prots, delays in product launches and growth plans, loss
of customers, higher cost of capital, damage to image and reputation,
and lower share price/ shareholder value. is research revealed the many
damaging eects of supply and demand disruptions.
2013
e start of 2013 featured the release of a report from the World Economic
Forum (WEF) in Davos, Switzerland. e sponsors of the report were
Zurich Insurance, Accenture, Partners against Corruption (PACI), and the
World Economic Forum. e report, titled Building Resilience in Supply
Chains, was an outcome of WEF’s initial Supply Chain Risk Initiative
started in 2011. A clear nding in this report is the need for organizations
to shi from reactive to proactive risk management. Another relevant
nding is that more than 80% of companies are now concerned about sup-
ply chain resilience. Study participants also indicated there is a need for
a common risk vocabulary and that cyber risk may have the greatest risk
implications for supply chains.
e World Economic Forum’s report touched on what it will take to
make SCRM a bona de business discipline. Perhaps most importantly,
risk management must become an explicit and integral part of supply
chain governance. Other high- level suggestions for moving SCRM to a
business discipline include the following:
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