Supply Chain Risk Management: e As-Is Landscape • 35
• Institute a multistakeholder supply chain risk assessment process
across the enterprise
• Mobilize international standards’ bodies to further develop resil-
ience standards
• Incentivize corporations to follow agile, adaptable supply chain strategies
• Expand the use of data- sharing platforms for risk identication
and responses
A RIMS.org article mentioned the Risk Maturity Index developed by
AON Insurance and the Wharton School of Business. e index suggests
that companies with the highest level of risk maturity (a measure that
gauges the development of an organization’s risk strategy and framework)
experience 50% lower stock price volatility than less- developed counter-
parts. Over a two- year period (2010–2012) companies with higher risk
maturity ratings saw greater annual stock price returns. is was espe-
cially apparent when the only companies to see positive returns during
that volatile period were those with the highest risk maturity levels. ose
lower on the maturity scale saw losses between 17% and 30%. is work
again pointed out the critical relationship between risk management and
nancial outcomes.
Lloyd’s of London released several statistics in 2013 associated with
the Japanese earthquake and tsunami and ailand oods. e rst sta-
tistic they shared was the combined property and business interruption
losses, which reached a record- breaking $240 billion, with just $47 billion
of the losses covered by insurance. e insurance industry provides sup-
ply chain interruption products called contingent business interruption
(CBI). However,a large majority of companies impacted only had asset-
based property damage insurance. Some of the elements covered by CBI
include getting workers in and out of damaged facilities, working to get
power to facilities, and shipping and receiving goods into and out of facili-
ties. Chapter5 will reexamine the oods in ailand from a risk quanti-
cation perspective.
An interesting report from the Association of Insurance and Risk
Managers in Industry and Commerce (AIRMIC) titled Supply Chain
Failures: A Study of the Nature, Causes, and Complexity of Supply Chain
Disruptions, identied seven underlying factors that tend to be present
whenever supply chains go wrong: o- shoring, increasing complexity, cost
pressures, geographic clustering, modern communications, modern pro-
duction methods, and increasing dependency. e report also estimated
36 • Supply Chain Risk Management: An Emerging Discipline
that economic losses from supply chain disruptions have increased 465%
between 2009 and 2011.
And nally, Ernst & Young interviewed more than 420 CFOs and heads
of supply chains at technology, automotive, manufacturing, aerospace,
and defense companies. e report concluded that when CFOs and supply
chain leaders form a closer business partnership within a company, they
report better results in a number of areas, including the company’s nan-
cial position. e study found, for example, that 70% of CFOs and 63% of
supply chain executives said their relationship had become more collab-
orative over the past three years. e merger between nance and supply
and supply chain professionals appears to be an inevitable one.
e intriguing outcome from this survey is, because CFOs take a long-
term approach to formulating business strategy, they are in a unique
position to manage risk and plan for business continuity, something that
challenges supply chain managers who tend to think in terms of shorter
time horizons. e CFO also has the opportunity to work with the pro-
curement and treasury groups to determine the extent to which risk is
owned and managed by the company and the extent to which it is pushed
down through the supply chain.
In 2013 the authors of this book published several articles on SCRM.
One key article was SCRM: e New Discipline of Supply Chain Excellence.
Aer several years of teaching in the classroom and conducting workshops
around the globe, we became thoroughly convinced of the need for SCRM
to become a discipline. e article identied what was emerging from the
classroom and from the practical application of the body of knowledge in
the eld. is article was a major impetus for this book.
FOUR PILLARS OF SUPPLY CHAIN RISK MANAGEMENT
We would like to nish up our “as- is” discussion by providing an assess-
ment of the state of supply chain risk management. is will involve some-
thing we call the Four Pillars of SCRM. ese pillars include supply risk,
process risk, demand risk, and environmental risk. Each pillar encom-
passes its own set of tools, techniques, tactics, metrics, people, processes,
and program issues. e complexion of each pillar is below.
Supply Chain Risk Management: e As-Is Landscape • 37
Supply Risk
e complexion of this pillar encompasses areas such as supplier conti-
nuity, strategic sourcing, supplier viability and capability, raw material
pricing, supplier assessments, inbound logistics, fraud, corruption, and
counterfeiting. Inherent risks here are disruptions caused by the inability
of suppliers to deliver on time, quality failure, nancial failure, compli-
ance failure, channel complexity, and communication failure.
Process Risk
is pillar includes IT systems, mergers and acquisitions, marketing
strategy, organizational structure, frameworks and metrics, supply chain
strategy and execution, manufacturing and quality, organizational risk
assessment, heat maps, and war rooms. e inherent risks here include
disruptions caused by quality problems, inventory shortages, late deliver-
ies, capacity shortages, equipment breakdowns, IT outages, poor overall
execution, and misalignment of strategy and metrics.
Demand Risk
e complexion of this pillar covers areas such as new customers, market
trends, consumer interest/ spending, demand management/ forecasting,
distribution requirements planning, product integrity, customer service,
and scenario planning. Inherent risks here are disruptions caused by prob-
lems in distribution, actions by competitors, product reputation, brand
management, social media/ trending, logistics, and customer sentiment.
Environmental Risk
is nal pillar encompasses areas such as government regulations, taxes,
economic volatility, currency exchange, natural disasters, and compli-
ance. Inherent risks are natural disasters, geopolitical and energy risks,
port security, logistics and facilities security, currency exchange uctua-
tions, global economics, war, pandemics, and civil disobedience.
We have compiled a prole of the maturity and activity level for each
pillar. Figure2.3 depicts our assessment of the maturity and activity level
38 • Supply Chain Risk Management: An Emerging Discipline
for each pillar. On the le or y- axis is the maturity level of each pillar. e
horizontal x- axis depicts the Four Pillars, and the size or length of each
“box” is an indication of the activity level within each pillar.
From a maturity point of view, we feel the supply pillar is by far the most
mature of the four, positioned at about 70 out of 100. Why? Procurement
professionals have been dealing with supplier uncertainty and risk for
more than 50years. is discipline has become a profession, supported by
member- driven organizations who are providing certications to demon-
strate that these professionals have a command of the body of knowledge
and best practices. Tools such as supplier relationship management (SRM),
spend management, credit and nancial reporting by public credit orga-
nizations, and more have matured over the years. And the present activ-
ity level of new techniques such as supplier risk assessment; supply chain
mapping; and fraud, bribery, and corruption identication supported by
new cloud- based soware systems is providing the procurement profes-
sionals with a host of new tools and techniques to leverage in an eort to
identify, assess, mitigate, and manage supplier risk.
e next- highest level of maturity and activity, in our opinion, is the
demand pillar. Positioned at about 50 out of 100, demand management
solutions, such as sales forecasting and many other deterministic tools
have been around as long as the supply tools. So why then do we feel this
100 100 100 100
70
40
50
30
0
20
40
60
80
100
120
Supply Process Demand Environment
Maturity Index
e dierence
between the top &
bottom of each box
indicates the
scope of activity
FIGURE 2.3
Four- pillar SCRM maturity and activity level.
Supply Chain Risk Management: e As-Is Landscape • 39
pillar is at a lower maturity level than supply? e tools utilized in this pil-
lar have been developed to support processes that are purely forward look-
ing and one- dimensional, such as sales forecasting, and do not involve
any element of uncertainty or risk. Another tool, collaborative planning,
forecasting, and replenishment (CPFR), does provide some coverage of
risk because it attempts to support information sharing between supplier
and customer in an eort to minimize demand surprises and shocks to
the supply chain. New techniques and tools such as probabilistic plan-
ning, discrete- event simulation, and digital modeling are emerging to
assist demand managers and sales and operations planning (S&OP) pro-
cess owners to run “what- if” scenarios that will demonstrate how their
supply chains will act when a risk event shocks their organization. ese
new tools overtly handle uncertainty and risk and will take some time
to mature.
Next in the maturity and activity level is the process pillar. A tremen-
dous number of tools and techniques support all the processes we’ve
highlighted in this pillar. Many have been around for more than 40years
and are supported by professional organizations such as APICS, CSCMP,
ASQC, ISSSP, and others and also include professional certications.
Again, our reasoning for the pillar’s positioning is that many of the tools
do not embrace uncertainty and risk. ey support discrete, linear func-
tions, such as planning inventory, planning capacity, production schedul-
ing, quality, logistics, and more. ese functions are driven by solid supply
chain management metrics such as maximizing service, reducing cost,
and improving asset utilization, not mitigating risk.
And nally, the environmental pillar is very new and continues to
expand because of new industry- specic and governmental rules and reg-
ulations. ere is more and more activity in this area, but with new and
ever- changing regulations, this pillar will take a long time to solidify.
THE SUPPLY CHAIN RISK MANAGEMENT ADOPTION
We’ll nish this chapter with a brief discussion on what we call SCRM
Adoption. is utilizes a categorization scheme revolving around lag-
gards, industry average, and early adopters. We want to leave you with a
sense of the operational complexion for each category in terms of SCRM
along with a few salient statistics from the early adopter companies.
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