Taking an Eyes-Wide-Open Approach to Managing Supply Chain Risk
By Mark Robinson, UPS Capital Corp.
An efficient and risk-controlled supply chain is an essential part of doing business for many retailers, and now more than ever, those supply chains are increasingly global in nature. Gone are the days when most retailers sourced and sold goods only through local and regional channels. Today, retail supply chains often stretch tens of thousands of miles, crossing oceans and continents.
Managing global trade can be challenging, but make no mistake: The global market is an avenue toward business growth. The web enables businesses to reach worldwide customers and procure goods from around the globe, leading to massive expansion opportunities.
But globalization also creates a more complex supply chain, which exposes companies to increased risk. Many disruptions – some foreseen and some that are surprises – can occur in a global supply chain and significantly inhibit business continuity and survival, even for large companies.
The first step to protecting your company against risk is understanding the many complexities presented by a global supply chain.
Controlled and uncontrolled risk
Most retail logistics professionals know all about “controlled” risks, which could include product recalls, inventory fulfillment delays, and other consequences that are more or less standard for retailers. The great thing about controlled risks are that they are readily apparent and relatively easy to anticipate, enabling companies to create strategic plans to prepare for the inevitable.
In other cases, there are issues that are much harder for retailers to predict and protect against, which are “uncontrolled” risks. Consider the impact that political conflicts, natural disasters, and even maritime piracy can have on your supply chain. These aren’t things that you anticipate as business as usual, but if they do occur, they can have a dramatic impact on your supply chain and business continuity, especially for small or mid-sized retailers.
For example, consider the impact of the devastating tsunami in Japan in 2011. The ripple effect of that unexpected, uncontrolled risk was monumental for Toyota. Suppliers in Japan couldn’t fulfill orders, which had a significant negative impact on the company’s retail dealers around the world.
The global economy has changed how companies must approach risk management, especially in the supply chain. Sure, you might think uncontrolled risks like natural disasters and political conflicts are so unlikely that you don’t need to protect against them, but think about the dramatic negative impact those risks can have on your supply chain – and your business – if they do occur. Consider the following scenarios:
- What would happen if your business is single-sourcing and your supplier is unable to provide inventory for several weeks due to a natural disaster? This very scenario became reality recently with the massive flooding in Thailand.
- How would your business be impacted if a political conflict disrupted your global logistics trade lanes?
- Would you be able to maintain your business and keep customers satisfied if maritime pirates seized the ship carrying your cargo? Jack Sparrow might be a fictional Disney movie character, but the pirates off the coast of Africa are very, very real.
To begin to address risks, create your own list of “Worst-Case Scenarios,” perhaps the top five issues that could completely disrupt your supply chain. Recognizing the most important controlled and uncontrolled risks to your business helps inform the portfolio of risk management solutions you need to protect your business. No company wants to encounter risk, but identifying potential risks and how to guard against them is critical to your business.
Diversify your risk mitigation portfolio
Knowing the amount of risk your business can endure from a financial, customer, and brand perspective is critical. No business strategy is complete without factoring in how much risk can be tolerated and your company’s ability to absorb those risks. Even if your supply chain fails, particularly in the case of an uncontrolled risk, the key is to be able to absorb the impact, if possible, through an offsetting business strategy.
Is your business prepared? Have you considered alternative business strategies to guard against controlled and uncontrolled risks?
Again, consider Toyota in the wake of the tsunami in Japan. At the height of the crisis, Toyota predicted a massive drop in manufacturing and revenues; however, wise business tactics to suppress demand, including offering many cars through short-term leases, enabled the company to optimize supply more quickly once power stations and supplier factories returned to operations. In other words, Toyota adapted its sales strategy to mitigate the risk of declining sales stemming from an uncontrolled risk materializing in its supply chain.
Basically, Toyota was resilient in the wake of a crisis. Another way to create resiliency is to never single-source any part of your supply chain. Companies, regardless of size, should consider setting up a secondary supply chain on a smaller scale. By having secondary suppliers in your back pocket, you can be better prepared to avert the risks of weather, politics, geography, fraud, bankruptcy, and others that can break down a supply chain.
Many retailers also do not have risk management personnel who specialize in studying vulnerabilities within the supply chain and how to prevent them and recover from them if they do occur. One way to rectify this problem is by working with a third-party logistics provider (3PL) to help you manage risk and operate your supply chain.
Most 3PLs can scale their services up and down based on a company’s size or requirements. They can also provide the resources and services that businesses need to help avoid supply chain disruptions. For example, when goods needed to move into New Orleans after Hurricane Katrina, UPS was able to secure carriers to ensure that goods and supplies continued to move.
One simple way to protect against supply chain risks is through cargo insurance, which protects your businesses against losses if their shipments are damaged or lost as they make their way from overseas suppliers.
You may also consider credit insurance for your business, which helps retailers assess the creditworthiness of their major international buyers and protect against slow payments, bankruptcy, and insolvency.
There’s no way to completely avoid risks in your supply chain, which makes identifying and working to protect against risks necessary and beneficial for retailers. Identifying the broad range of controlled and uncontrolled risks your company faces and integrating a wide range of risk management solutions into your business strategy is critical to creating and sustaining success.
Mark Robinson is a VP of UPS Capital Corp., the financial services arm of global logistics leader UPS. For more information go to https://www.upscapital.com/contactwww.upscapital.com/contact.