The Calm Before the Storm: The New Normal of Risk Management in 2012

The year 2011 was a volatile one for financial markets and supply chains. The tragic Great East Japan earthquake and tsunami in March and the severe Thailand flooding in October disrupted supply chains around the globe. These events brought international attention and spurred a frenzy of discussion on supply chain risk management. These discussions were not relegated to supply chain circles, but reached the mainstream business news outlets, including the Wall Street Journal and the Financial Times. Indeed, President Obama himself weighed in on the topic in January by releasing his National Strategy for Global Supply Chain Security. (In response, our CEO, Hamish Brewer, responded to the President in his blog post, Open Letter to President Obama).

Fast forward to today: The first 10 weeks of 2012 have been benign, with financial markets and supply chains relatively stable. The European debt crisis and political unrest in the Middle East continue; this creates an overhang for financial markets and oil prices, but thus far, they appear to not have had a major impact on the global economy.

Is this the calm before the storm? Is risk management now a permanent part of the dialogue and the science of supply chain management, or are we back to business as usual?

Reading the Tea Leaves

Here’s my view.

The fact is that risk management has always been part of the science of supply chain management. Basic inventory management is about risk management: Cycle and safety stock policies plan inventory for lead-time dynamics and risk associated with demand and supply. What’s different now is that supply chain risk management has clearly gained a seat in corporate boardrooms. The tragedies of 2011 brought a crescendo to a decade of earthquakes, hurricanes, tsunamis, political instability, financial meltdowns, SARS (severe acute respiratory syndrome) and bird flu, oil spills, port strikes, and even ash plumes from volcano eruptions. Every time such a major event has happened, it has highlighted the interconnectedness brought about by globalization and information technology (see more on this topic in a future blog post). We are now beyond the tipping point – supply chain risk management is a critical topic for the C-suite for any company that services global markets.

So, where are we? One way to determine if supply chain risk is being discussed proactively is to see if it’s discussed in companies’ financial reporting.

I recently perused a number of 10Ks for manufacturing companies to understand if supply chain is among the material risk factors companies and their auditors include in the risk management section. The results of this exercise are interesting – there is a wide variation across companies. The amount of supply chain information provided in the risk discussion ranges from nothing to details on manufacturing locations and specific risks associated with those locations.

My view is that supply chains will be increasingly discussed in the risk management section of 10Ks and may even be part of international financial reporting standards (IFRS). The good news is that based on the detail provided by a number of the company reports I reviewed, it is clear that some companies have an intimate knowledge of the risk factors in their supply chains. Some reports, for example, explore the degree of vertical integration and dependence on key suppliers, including the location of such suppliers and risks. However, this still appears to be the exception rather than the rule. Given the potential material impact of single sources of supply and other issues, I believe that will be reversed in the future.

What are your thoughts? How has supply chain risk management changed for your company?

 

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