288 • Supply Chain Risk Management: An Emerging Discipline
a clear indicator that risk management is maturing and growing as a disci-
pline. In this sense, the evolution of risk management processes and capa-
bilities will be no dierent from any other important process or approach
that we have seen over time.
e “pockets” model also extends to the kinds of risks that a company
must manage. A supply chain organization may be skilled at assessing the
nancial integrity of its current and potential suppliers (nancial risks).
However, this same organization may be less eective at detecting day- to-
day issues that aect supply chain performance (operational risks). e
scope of a risk management approach and the kinds of risks that a company
can manage eectively will expand across an enterprise and supply chain.
Prediction 6: Total cost of ownership (TCO) modeling will become a
routine part of the risk management process.
Several factors will ensure that total cost models will increasingly become
a more routine part of the risk management process. First, the need to
replace unit cost data with total cost data is becoming well accepted.
Making important supply chain decisions with limited data simply pres-
ents too much risk. Second, a global strategy based on sourcing in emerg-
ing markets demands better data upon which to base decisions. What is
the true cost of sourcing in China as exchange rates shi and the Chinese
government provides incentives for suppliers to move inland in search of
available labor and lower wages? What is the cost of additional complexity
as supply chains become longer?
Similar to forecasting models (and some TCO models should be looked
at as cost- forecasting models), risk managers will increasingly validate
their data, information, and assumptions as actual inputs become avail-
able. Depending on the model, total cost models are oen populated with
data that are future estimates (such as estimates of a supplier’s expected
quality performance) or averages (such as the average nonconformance
cost of a late supplier delivery). We fully expect a movement away from
making sourcing decisions based on price and toward decisions based on
total cost. To not do so exposes a company to excessive risk.
Prediction 7: Home- grown risk management tools will increasingly be
replaced by third- party solutions.
Feel free to take this prediction to the bank. At most companies risk man-
agement tools and approaches are still in their infancy. As with many
Future Directions in Supply Chain Risk Management • 289
evolving concepts, early risk assessment tools are developed internally
simply because external tools and applications are not yet available. Or the
tools that are available don’t quite t our requirements. It is not unusual
for companies to have a need, scan the marketplace, and conclude that the
marketplace is lacking in its oerings. We expect third- party risk manage-
ment tools and applications to proliferate as providers, particularly so-
ware providers, develop sophisticated risk management tools that respond
to marketplace needs.
irty years ago one of the authors of this book helped to internally develop
a warehouse management system (WMS) to help manage distribution cen-
ters. Why was the system developed internally? It was developed internally
because no third- party tools were available that even remotely satised this
company’s requirements. How the times have changed. Inbound Logistics
magazine regularly presents its listing of the top 100 WMS systems provid-
ers, a list that is narrowed from a pool of 300 providers!
Most companies, even those with well- recognized supply chain man-
agement capabilities, are still progressing along a risk management matu-
rity curve. As they become more sophisticated, so too will the tools they
require to manage risk. As demand increases for these tools, the market-
place will respond with an abundance of applications that will be much
more powerful than what is available today. is is inevitable.
Prediction 8: Risk categories and specic risks will evolve and change,
and these categories and risks will dier from industry to industry and
company to company.
e risks that companies face are dynamic rather than static, particularly
since many companies expect to expand geographically away from their
home borders. Worldwide expansion creates greater supply chain com-
plexity, which correlates directly with increased risk.
Evolving risks will oen dier across companies and industries. A
nancial services rm will perceive a dierent set of risks to be critical
ve years from now, such as the integrity of its data from emerging mar-
kets, compared to companies that are heavily dependent on raw materi-
als. Companies that rely on raw materials are increasingly concerned,
for example, about the impact of rules addressing conict minerals
from Africa as well as commodity market manipulation. Other compa-
nies are concerned about evolving supplier risks regarding greenhouse
gases, workplace conditions, labor issues, and the use of toxic materials.
290 • Supply Chain Risk Management: An Emerging Discipline
Everyone sees risk through a slightly dierent prism, and that prism will
continuously evolve and change.
Prediction 9: Risk management approaches will rely increasingly on
anticipation and less on reaction.
Most companies recognize their prociency, perhaps even their heroics,
at responding to risk events. Unfortunately, this is not what most com-
panies want to be known for. Most supply chain organizations would
rather be recognized for their prociency at sensing and preventing risk
events rather than reacting to and mitigating risk events. Risk reaction
or responsiveness, when it occurs, should be because it is the appropriate
risk response rather than the default option.
Risk prevention will receive greater attention during product develop-
ment and supplier selection, both of which are logical times to think about
preventive activities. A word of caution is in order here. (How many times
could we have used that phrase in this book?) Preventive actions taken
during product design can lead to a new set of risks that must be managed.
One company that is working to simplify its product designs now relies on
suppliers to the point that suppliers are design partners. is arrangement,
however, invites a new set of risks, particularly concerns about intellectual
property (IP) ownership and becoming overly dependent on suppliers.
Conversely, some suppliers are concerned about turning over their intel-
lectual property to customers during the design process or being asked to
provide customers exclusive use of new technologies or innovations.
Prediction 10: Risk management awareness will increasingly aect cor-
porate culture, sometimes positively, sometimes negatively.
e eect that risk management has on a company’s culture can be a posi-
tive or negative force as we look toward the future. On the positive side,
as the language and practice of risk management becomes an embedded
part of an organization’s culture, personnel at all organizational levels and
within all functional groups will consider risk implications when making
decisions and formulating strategies. From the highest to lowest organiza-
tional levels, a continued emphasis on risk will create a healthy awareness
of decision factors that may have previously been minimized or ignored.
On the negative side, risk awareness can lead to risk obsession, resulting
in a culture that is excessively risk averse. At that point, risk paralysis pre-
vents a company from pursuing the kinds of activities and initiatives that
support future growth.
Future Directions in Supply Chain Risk Management • 291
Prediction 11: Supply chain risk will increase as companies pursue
sourcing and selling opportunities in emerging markets.
For those who are dreaming about a future that features far less supply
chain risk than what we see today, do not lose sight of your dream. It will
likely not come true, but never lose sight of the dream. Part of the rea-
son we think that supply chain risk will increase is that we do not expect
companies to stop their incessant search for low- cost suppliers or for sell-
ing their products in emerging countries. is means that companies will
be doing business in regions that are not quite as familiar or friendly as
what they are accustomed to. e result of pursuing buying and selling
opportunities in emerging markets is that supply chains will continue to
become longer, more complex, and inevitably more risky. Within supply
chain management, this will raise the need to obtain market intelligence
and manage risk.
Prediction 12: Enterprise risk management and supply chain risk man-
agement will increasingly overlap.
Enterprise risk management (ERM), which most companies have prac-
ticed in some form for decades, and SCRM, which is relatively new, will
increasingly be viewed as interdependent rather than independent disci-
plines. Part of this is due to the strategic implications associated with sup-
ply chain risks, particularly supply disruptions. And as these disruptions
and supply chain events become more severe, so do their strategic implica-
tions, which is what qualies a risk to become part of a company’s strategic
risk prole. As public companies fulll their reporting requirements (refer
back to the mandated reporting of corporate risk presented in Chapter1),
supply chain participants are increasingly part of this corporate reporting
process. And supply chain executives are increasingly part of executive risk
committees. Supply chain risk and enterprise risk will increasingly overlap.
AN EVOLVING RISK MANAGEMENT MATURITY MODEL
As we conclude our discussion of SCRM, we are convinced that as SCRM
becomes a discipline, many frameworks, protocols, models, tools, tech-
niques, and methodologies will emerge. In fact, an Internet search reveals
that dozens of risk maturity models are already available across various
292 • Supply Chain Risk Management: An Emerging Discipline
industries and professional groups. It seems that anyone who has engaged
in some aspect of risk management has created a risk maturity model. Each
of these models has steps that evolve from phases such as unaware, reac-
tive, or very basic to optimized, integrated, or advanced in terms of risk
management maturity and capabilities. No shortage of models exists today.
Supply Chain Risk Maturity Model
A key roadmap and critical success factor for the SCRM journey is some-
thing we call the Supply Chain Risk Maturity Model. is new discipline
is a journey, more so than a set of point- in- time solutions. Even though
new solutions are emerging every day, many of which have been proled
in this book, the real key to the success will be the ability to eectively
move through an SCRM Maturity Model and build expertise and knowl-
edge that allows a company to dierentiate itself from the competition.
Figure15.2 illustrates the SCRM Maturity Model. e following provides
a few relevant attributes that we feel will support supply chain excellence
in each stage of the risk management journey.
Visibility
Visibility and awareness of risk across the supply chain is an important
rst step within the risk management journey. is also relates to know-
ing, preferably in real time, the location of materials and assets, such as
Supply Chain Maturity
Competitive Advantage
Visibility
Predictability
Resiliency
Supply Chain
Risk
Management
Supply Chain
“Sense &
Respond”
Supply Chain
Visibility
Sustainable
Supply Chain
Sustainability
21
st
Century Supply Chain Risk Management Maturity Model
FIGURE 15.2
Twenty- rst century SCRM maturity model.
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