283
15
Future Directions in Supply
Chain Risk Management
e future of supply chain risk management (SCRM) promises to be excit-
ing, challenging, and surely a bit frightening. Something that we should
have concluded by now is that the world will not suddenly become a
kinder and gentler place. If we believe that to be true, and most observers
are willing to bet that the world is going to become more rather than less
susceptible to risk, then supply chain leaders cannot aord to lower their
guard. e future will belong to those companies that not only embrace
risk but also understand how to anticipate and prepare for risk.
is last chapter of the book provides a forward- looking view of supply
chain risk. e rst section presents a set of predictions that we believe
have a high probability of occurring. e second section depicts a risk
management maturity model that will help position our thinking regard-
ing the evolution of SCRM. e chapter concludes with some managerial
guidance about moving forward in terms of risk management capabilities.
SUPPLY CHAIN RISK MANAGEMENT PREDICTIONS
Let’s dust o our crystal ball and take a peek into the future. While we
could make dozens of risk predictions, the following are based on exten-
sive experience and research and have a strong, although not guaranteed,
likelihood of becoming a reality.
Prediction 1: Company attitudes toward risk will start to shi.
A common view among supply chain managers is that risk is something
most closely associated with loss. As a result, it is something to avoid. As
284 • Supply Chain Risk Management: An Emerging Discipline
companies become more condent in the economy (and that remains a bit
of a wild card) as well as in their risk management capabilities, we expect
risk attitudes to shi. e phrase we like to use is that companies will show
a greater willingness to engage in “thoughtful” risk taking. Most of us
realize that uncertainty and risk are part of a new normal. Without ques-
tion many companies will become more comfortable operating with risk
as they learn to compete in this new normal. Companies should become
less anxious about risk, although not to the point of complacency.
Something that aects executive perception toward risk is a belief that
a strong commitment to innovation, particularly radical or “blue sky”
innovation is incompatible with a culture of risk management. Some will
perceive that innovation leads to excessive risk, a belief that can aect
new product development, strategic planning, capital allocation, and sup-
ply chain management decisions. A study by Accenture, however, found
that the beta of Forbes’s most innovative companies averaged just a frac-
tion more than less- innovative peers. (A beta value is the measure of a
company’s share price volatility relative to the market’s overall volatility.)
Statistically, no meaningful relationship exists in the Accenture study
between innovation and risk, at least in terms of stock volatility.
Prediction 2: Risk management will become an embedded part of sup-
ply chain management.
To date, SCRM initiatives have largely been handled separately from
the normal job responsibilities of supply chain managers. As companies
become better qualied in their understanding and planning for risk, we
expect that risk management initiatives will become a more routine part
of the supply chain management process, much as supplier audits, supplier
development, supplier relationship management, and supply measure-
ment have become a routine part of supply management.
Embedding risk management directly into chain supply management
does not mean that the importance of risk management will somehow
diminish. In fact, the opposite is likely to be the case. As risk manage-
ment becomes a recognized part of an organization’s operating culture,
risk issues will increasingly be considered early on when making sup-
ply chain decisions. Supplier selection teams, for example, will not only
consider a supplier’s operating capabilities, but they will also routinely
assess a potential supplier’s nancial condition as well as its risk plans
and capabilities. Selection teams will also consider geographic location to
ensure that a supplier is not too clustered with other suppliers or located
Future Directions in Supply Chain Risk Management • 285
near known hazards. e bottom line is that supply chain managers will
become risk managers.
Prediction 3: Companies will emphasize risk management eorts past
tier- one suppliers.
A common risk management model is to take it as an article of faith that
rst- tier suppliers will monitor their suppliers (which are your second- tier
suppliers), and for second- tier suppliers to monitor the next tier of suppliers.
Assuming this will happen regularly is a fool’s proposition, to say the least.
A typical refrain when speaking with supply chain executives is that
most risk management initiatives stress, and usually stop at, rst- tier sup-
pliers. A CAPS Research survey revealed that while 75% of participants
report they have good risk management visibility to critical tier- one sup-
pliers, just over 30% report having visibility to critical tier- two suppli-
ers.
1
e need to focus on what is happening at the subtier levels of supply
chains has never been greater. As one original equipment manufacturer
(OEM) aerospace executive commented, “ere is always some small shop
out there in the sub- tiers that we just don’t know about that will disrupt
us.” Without question the need to pursue risk management initiatives at
the subtier supplier level has become a necessity.
e question becomes how to manage sub-tier suppliers from a risk
perspective.
One way is to evaluate a potential supplier’s risk management capabili-
ties during supplier selection visits. To date, few companies truly evaluate
how well a potential supplier manages risks in its part of a supply chain,
although these companies are not shy about evaluating suppliers across
many other performance dimensions. While you are assessing a supplier,
why not assess how well that tier- one supplier manages its suppliers (which
are your tier- two suppliers)? Another approach that will gain in popularity
is mapping supply chains past the tier- one level. Graphical presentations
of supply chains can provide a wealth of insight. ere is simply no excuse
today for not knowing what life looks like past your tier- one suppliers.
e aerospace industry provides a good case study regarding why sub-
tier risk management will increasingly be on the radar screen. Figure15.1
depicts the aerospace manufacturing supply chain structure. While each
tier presents its own unique challenges, the tier- four level has started to
cause concerns among industry participants. e industry has witnessed
some major supplier consolidation at the tier- four level, which involves
metal fabricators and casting suppliers. is consolidation is a growing
286 • Supply Chain Risk Management: An Emerging Discipline
source of concern for customers as it creates stronger pricing power and
market leverage for new, larger suppliers. One expert notes that in many
cases only one or two qualied suppliers now exist for an item.
2
is is
particularly troublesome as Boeing and Airbus face not only new com-
petitors but each also has a record aircra order backlog.
Another example of the need to understand the supply chain past tier-
one suppliers involves Aston Martin, a company known for supplying the
cars that James Bond drives. e company was forced to respond to com-
plaints of the throttle pedal arm breaking. A root cause analysis revealed
that a tier- three supplier in China used counterfeit material that made its
way into the pedal.
3
Reports indicate that MI5 was not amused. Aston
Martin announced it is planning to re- source the manufacture of pedal
arms from China to the United Kingdom as soon as possible.
Prediction 4: Supply chain risk metrics will stress real- time predictive
indicators.
Far too oen risk management relies on historical data or a “batch”
approach with periodic updating of data and information. is creates
data lags that, at times, can be problematic. A performance x may be
Tier 4
Materials & Specialty
Processes
Tier 3
Make-to spec
Machine Shops
Tier 2
Components and
Sub-Assemblies
Tier 1
Aircraft Systems &
Major Structures
Tier 0
Aircraft OEM’s
FIGURE 15.1
e aerospace supply chain structure adapted from ICF International and Aviation Week
and Space Technology.
Future Directions in Supply Chain Risk Management • 287
implemented with a supplier relatively quickly, for example, but because a
measurement system refreshes data only monthly, it may still show a sup-
plier as being high risk, at least until the next update.
Many companies are searching for a better “crystal ball” for predicting
risk. Rather than knowing what has happened, tools featuring predictive
analytic capabilities that anticipate risk events before they occur or before
an event results in more a serious loss will be highly sought aer. We
expect to see the increased development of supply chain operational indi-
cators that are applied within algorithms that have predictive capabilities.
is shi toward real- time indicators will diminish the value of supplier
scorecards, which are almost always backward looking. We could commit
a fair amount of space here to the reasons why supplier scorecards will
likely not be at the forefront of future risk management eorts. Scorecards
will remain in place at most companies simply because of a reluctance
to eliminate a system that enjoys a level of comfort internally and with
external suppliers.
Automation and real- time updates and monitoring, including those that
ll in the gaps between regular risk assessments, are a direction most com-
panies will move toward, particularly with critical suppliers and logistics
providers. Furthermore, automated data collection tools will help provide
a view of risk without having to conduct formal assessments. Companies
will continually search for opportunities to update the timeliness of their
supply chain data and information. We expect a continued move toward
real- time data and data transparency.
Prediction 5: A “pockets of excellence” risk management model will
move toward an enterprise- wide risk management excellence model.
An interesting phenomenon occurs as ideas such as quality management,
lean, and risk management evolve from concept to maturity. During
the concept phase, internal units usually cannot wait for companywide
or third- party- supported solutions, so they develop their own tools and
approaches, resulting in varying levels of competency across a com-
pany. We oen see internal sites or units displaying a capability that is
not shared across the enterprise. e challenge becomes one of extending
these “pockets of excellence” across an entire enterprise and supply chain.
Eventually, as a concept gains widespread attention, these pockets of
excellence become more widespread before a company can expect to cap-
ture a sustainable advantage. is cross- enterprise standardization will be
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