Managing risk for sustainability
Many companies are focusing on supply chain sustainability—looking beyond pure financial results to minimizing the environmental and societal impacts of operations. Ultimately, sustainability is an effort to preserve the long term operations of a company, its supply chains, and its community. Building a sustainable supply chain requires a keen focus on long-term strategies; maintaining a sustainable supply chain requires a focus on operational excellence and management of risks in the supply chain. In fact, effective risk management is an essential component of any sustainability strategy.
Recently, the Supply Chain Council chartered a team to research the best way to approach risk management in the supply chain. The team found four key components of successful risk management programs:
•a comprehensive, formal risk management approach;
•clear, structured identification and quantification of risks;
•coordination of risk management throughout the organization and across supply chain partners;
•and effective conversion of mitigation strategies into operational reality.
Across these four elements, the team found the Supply Chain Operations Reference (SCOR) model to be an excellent framework for structuring, communicating, and executing a supply chain risk management program. Using SCOR ensures the risk management program achieves real business results.
SCOR provides a structure that allows managers to overcome some of the common pitfalls in implementing risk management programs. Using the SCOR model forces a comprehensive view of the supply chain and, therefore, a comprehensive risk assessment. SCOR also adds structure to risk programs, which focuses effort and supports effective prioritization of risks.
The core of a SCOR-based risk management program is a common metric for quantifying risks so they can be prioritized according to their potential impact on operations. To do this, SCOR uses Value at Risk or VAR. VAR measures risk in terms of the probability of the event occurring and the financial impact to the supply chain if the event does occur.
For example, if a distribution center is located in an area that has a ten per cent probability of experiencing a hurricane, and a hurricane strike would disrupt the supply chain resulting in $1,000,000 in costs and lost sales, then the VAR for this one event is $1,000,000 * 10% or $100,000. In reality, this measurement would be a continuous curve ranging from the probability and impact of a storm that disrupts power supply for an hour to a direct strike from a category five hurricane that disrupts operations for weeks.
The power of VAR is the ability to put all risks—adverse weather, labor disputes, equipment failure, etc.—into common terms for comparison and prioritization. VAR also takes risk out of supply chain terms of late shipments and stock shortages into terms that make CEOs and CFOs take notice: financial impact. This also, in turn, makes it easier to allocate resources to mitigation programs because a clear return on investment can be calculated. VAR also supports collaborative efforts with supply chain partners. With risk in financial terms, companies have a foundation for cost or profit sharing arrangements that reduce risks across the supply chain.
Supply chain managers are increasingly being asked to take a more comprehensive view of supply chain success and sustainability. To accomplish this, managers must broaden their perspectives of efficiency and effectiveness to include the environmental and social impacts of operations and the impact of disruptions in the supply chain. A well structured, comprehensive risk management program is a critical component of a sustainability strategy.
•a comprehensive, formal risk management approach;
•clear, structured identification and quantification of risks;
•coordination of risk management throughout the organization and across supply chain partners;
•and effective conversion of mitigation strategies into operational reality.
Across these four elements, the team found the Supply Chain Operations Reference (SCOR) model to be an excellent framework for structuring, communicating, and executing a supply chain risk management program. Using SCOR ensures the risk management program achieves real business results.
SCOR provides a structure that allows managers to overcome some of the common pitfalls in implementing risk management programs. Using the SCOR model forces a comprehensive view of the supply chain and, therefore, a comprehensive risk assessment. SCOR also adds structure to risk programs, which focuses effort and supports effective prioritization of risks.
The core of a SCOR-based risk management program is a common metric for quantifying risks so they can be prioritized according to their potential impact on operations. To do this, SCOR uses Value at Risk or VAR. VAR measures risk in terms of the probability of the event occurring and the financial impact to the supply chain if the event does occur.
For example, if a distribution center is located in an area that has a ten per cent probability of experiencing a hurricane, and a hurricane strike would disrupt the supply chain resulting in $1,000,000 in costs and lost sales, then the VAR for this one event is $1,000,000 * 10% or $100,000. In reality, this measurement would be a continuous curve ranging from the probability and impact of a storm that disrupts power supply for an hour to a direct strike from a category five hurricane that disrupts operations for weeks.
The power of VAR is the ability to put all risks—adverse weather, labor disputes, equipment failure, etc.—into common terms for comparison and prioritization. VAR also takes risk out of supply chain terms of late shipments and stock shortages into terms that make CEOs and CFOs take notice: financial impact. This also, in turn, makes it easier to allocate resources to mitigation programs because a clear return on investment can be calculated. VAR also supports collaborative efforts with supply chain partners. With risk in financial terms, companies have a foundation for cost or profit sharing arrangements that reduce risks across the supply chain.
Supply chain managers are increasingly being asked to take a more comprehensive view of supply chain success and sustainability. To accomplish this, managers must broaden their perspectives of efficiency and effectiveness to include the environmental and social impacts of operations and the impact of disruptions in the supply chain. A well structured, comprehensive risk management program is a critical component of a sustainability strategy.
