Supply Chain Risk, Perceived Versus Real.

By Katina Gad

Supply Chain Risk is a complex subject encompassing the perspectives and influence of many different types of organizations worldwide, it is relevant within every industry engaged in trade on domestic and international levels. Every year multiple research studies are conducted analyzing different types of supply chain risk by industry professionals and government agencies, the findings of some of the more innovative studies are presented and discussed during the Transportation Research Board of the National Academy of Sciences annual meeting in Washington DC every January. This was my fourth year attending the annual meeting, my third year attending it as a young member of the International Trade and Transportation Committee, my second year as a chair on the Freight and Marine Young Members Council, and the first year that I felt acclimated to the event allowing me to better focus on the presentation of specific types of research which are relevant to my interests including Supply Chain Risk. I could carry on about this subject at great length, but considering this is a blog not a paper, I will restrict the length of this post and limit the number of supply chain risks covered within it to five.

The TRB annual meeting is attended by a mixture of professionals from both the private and public sector from across the United States, and there is limited participation from international guests. The subject of supply chain risk management is presented on from both private and public (government) industry standpoints during the meeting, both views overlap and both industries hold their own definitions and positions on what management of these risks involves. The clearest differences in what private industry and public industry perceive as supply chain risk is what is being protecting, and when and how risk management is performed. For private organizations protecting brand image and improving or maintaining financial performance is the focus, for Government organizations risk management focuses on the protection of systems and partnerships that have been made with both private companies and with foreign nations through trade negotiations and through the work of the Department of Commerce. Neither sector’s description of risk management have been presented as incorporating the core concept of sustainability (which would be inclusive of people, planet & prosperity) into their strategy, both emphasize the priority of maintaining profitability, and vaguely prioritize collaboration with supply chain partners.

Supply Chain Risk Management to Private industry involves: (Via presentations by representatives from APICS & Volpe National Transportation Systems Center)

  • A collaborative structured approach initiated in strategic planning phases and continuously improved upon throughout the processes conducted within a supply chain.
  • Identification and evaluation of risks that pose a threat to the goals of the organization, developing strategies for prediction of these risks in the future, and mitigation or prevention of identified risks.
  • Preventing missed opportunities, ensuring resiliency and the continuance of profitability.
  • Minimizing organizational vulnerabilities

Supply Chain Risk Management to the US government involves: (Via WhiteHouse.gov )

  • Creating and protecting a global supply chain system which supports innovation and prosperity.
  • Ensuring the timely, secure, and reliable movement of goods within US borders and worldwide.
  • Protecting the current system’s continuity.
  • Implementing cost-efficient & effective measures that will strengthen the system and expedite goods movement and lawful global commerce.

Two types of risk perceived by both public and private industry which are clearly defined, and management strategies have been developed over a period of time for are: Security risks (those associated with piracy and potentially due to terrorism) and Safety risks (those associated with natural disasters). These risks have in the past been managed almost exclusively by government agencies and insurance companies, however there is an increasing trend of involvement by the private sector over this past year in the management of these issues.

Security risks (those associated with piracy and potentially due to terrorism)

Piracy is an understood risk which has long been known to supply chain professionals. Continued research on the subject tends to focus on certain geographic regions of the world where the risk of vessels being pirated is a common occurrence. Over the past three years there has been growing concern centered around piracy targeting the marine transport of hazardous materials, specifically coal, liquid chemicals, and petroleum/crude oil. One specific region where there has been increased piracy over the past three years has been around the Jubilee oil field in Ghana, where marine vessels destined for the United States have had their cargo stolen. It has been predicted that ¼ of US oil supplies will come from the Gulf of Guinea by 2015, and increased security provided by the UN Security Council’s Combined Maritime Forces (CMF) group is being positioned in the region to ensure safe transport of oil without pirate interruption. Freight lines and ships are not leaving their safety entirely up to the UN Security Council however, more crews have invested in onboard safe rooms, advanced security alert systems, and have begun carrying arms while traveling through regions known to be frequented by pirates.

Safety risks (those associated with natural disasters) & Disaster logistics

Disaster logistics is a direct response to the supply chain risk caused by natural disasters. It is clear to all people that in the wake of an emergency getting those in need the aid necessary for their safety, and overall health and wellbeing is urgent. Unfortunately it is not the case that all organizations hold the position that providing recovery assistance to affected communities should take priority. There were several good presentations (two worth noting here were made by Moran Shipping Agency, the World Shipping Association) on lessons learned by freight and logistics professionals during recent natural disasters including Superstorm Sandy, which caused the shutdown of ports and logistics terminals in the busy NY & NJ port system. They stated that increased awareness of the need to be involved within local communities has resulted from these disasters, and that all parties involved have agreed that they must strengthen communication systems within their own networks to ensure continuation of service the next time disaster strikes. Most vendors and facilities in the past have relied heavily on contracted shipping agencies to manage their on location operations, but during disasters these workers were overwhelmed by the amount of organizations and individuals dependent upon them, and were often difficult to contact because of this. These organizations are now placing a higher priority on having people working on location directly with shipping agents and vessels instead of depending on remote employees who do not have physical access to the terminal.

disasterdisplacement

Distributing aid immediately following a disaster within the continental USA has been almost entirely left up to the government who has to enter the region because they are not normally on location when disaster strikes. It begins at the local level, then the state level, then on the national level through organizations such as the National Guard, U.S. Army Corps of Engineers, or other Department of Defense organizations. There is always a lack of participation from the private sector in presenting on providing humanitarian aid through disaster logistics, though they are usually in some capacity present on the ground when these disasters occur. Yes, I do recognize it is not possible to prevent a natural disaster, but the overall lack of response to disasters paired with a risk management strategy limited to ‘how do we salvage as much of our product from that region as possible’, ‘how do we divert our product away from that area as quickly as possible’ falls short on protecting the community, which under a sustainability focused company would be a priority. These are good solutions to have planned out in advance for response to the risk of a natural disaster in regards to protecting an organization’s net profit/bottom line, and these organizations have the potential and capacity to improve upon these strategies by including their triple bottom line within the scope of assets which should be protected. An improved response to the risk management strategy for natural disasters is one which values and prioritizes providing humanitarian aid to the people within communities they service.

Newer perceived risks…

Newer perceived risks which have presented themselves over the past  few years at TRB have not been clearly defined, and management strategies have yet to be successfully developed. Unlike the clear cut nature of natural disasters and piracy, these newer risks present freight and marine transportation professionals with a framework challenge. The inability to accurately pinpoint what specifically these risks are has limited progress in the research of them, and as a result has prevented viable managerial solutions from being developed by transportation research professionals. It is generally accepted that risk develops within four different spheres of an organization’s environment, which can be identified as

  • Risks derived from Input (/Sourcing/Manufacturing/Business administration)
  • Risks derived from Output (/Distribution/Sales/Marketing)
  • Risks derived from the Product (the finished product and raw materials it is composed of)
  • Risks which are derived from the external environment

The framing of these four different spheres is a point of contention, which is partially to blame for the lack of applicable resolutions to issues and risk management strategies. I have over the past four years during the TRB annual meeting noticed several perceived risks being renamed and redressed to fit into the categories of “supply side risk” or “demand side risk” which are sometimes used in place of input and output. These labels do a disservice to supply chain professionals as they enable the conflation of risks derived from internal and external influences. This misunderstanding of where a risk comes from prevents it from being accurately defined, so I will present here these perceived risks which have been presented recently here, explain why the named risk is actually an effect of the actual risk, and then attempt to identify the underlying real risk of each that should be researched and that solutions should be developed for.

Social Media (Perceived risk) versus Social Irresponsibility (Real Risk)

When and organization presents social media (an external factor) as a risk it demonstrates a certain resistance to change and ambivalence towards the technology which their customer base has come to know and love. Yes, your customers are talking about your business and your products regularly, and if you are doing it right you are there communicating with them regularly. If you have figured out social media you are there engaging your customers to include their opinions and needs in your product development process, and your staff responsible for operating social media is comfortable in communicating with these people perhaps even on a daily basis as a representative of your organization. However, some organizations should be afraid of social media, not just a little bit, but a lot. However this doesn’t mean that social media is the risk, assuming that follows along the lines of “don’t shoot the messenger’. Extensive backlash communicated via social media (meaning a large number of individuals are communicating displeasure with your product/brand/company) is a direct result of an organizations social irresponsibility. Social responsibility doesn’t mean you are an excellent firefighter, it means you are doing everything possible to prevent a fire from ever happening.

The misunderstanding of what social responsibility means may be best presented in the following quote from a recent article published in Supply Chain Management and Review titled The Socially Responsible Supply Chain: An Imperative for Global Corporations. The quote (bolded at the top of the article, singled out for emphasis) states “As the Bangladesh fires demonstrate, best practice supply chain thinking seems to have overlooked the social aspects of running a global supply chain. Disasters such as these put companies at risk of damaging their reputations and tarnishing their brands.” This hypocritical statement which mislabels the risk magnifies the obliviousness which is too commonly held by today’s supply chain managers. By wrongly labeling an after-effect (damaged reputations and tarnished brands) as the risk and foolishly assuming that a contingency plan could be the solution and achieve image salvation, this not only communicates that these organizations have not learned their lesson, but they also communicate the socially irresponsible opinion that their brands value is worth more than the value of human life (or in this case more important than thousands of lives and thousands more families now left without their loved ones)

Wouldn’t a “best practice” supply chain consider risk avoidance to be a component of their strategic (proactive) planning instead of a contingency (reactive) plan? Socially responsible organizations don’t view social media as a risk or a threat, they view it as an opportunity and a valuable tool. If you consider social media a risk it is time to stop labeling yourself as “best practice” because you are not fooling anybody.

Regulatory Compliance (Perceived Risk) versus once again Social Irresponsibility (Real risk)

When regulatory compliance is included in a list of supply chain risk, it is always described as regulations placed on what has been proven to be either pollution creation or labor exploitation which place excessive burdens on populations or natural environments. To label being restricted from harming people or the environment as a risk, once again inaccurately labels the effect the risk and ignores the cause. Regulatory Compliance in regards to limiting emissions was described as a risk within three separate presentations during TRBAM this year, and in separate rooms during several non-risk related sessions focused on sustainability there were strategies to reduce emissions, methods of standardizing CO2 measurement, & cost effective waste reduction methods being discussed. Not once in these sustainability sessions was the subject matter being discussed labeled “risk management”. Somehow it has escaped supply chain managers minds that causing environmental harm is a supply chain risk, one which hurts a company’s triple bottom line and sometimes results in protests or  boycotts carried out in response to damage done.

“Demand Volatility” & “Unpredictable Consumer Spending” (Perceived Risk) Versus “Economic Volatility” & the “Global Financial Crisis” (Real Risk)

 When will supply chain professionals stop dancing around the real issue that wealth inequality has reached a record high (and the gap is widening daily) and acknowledge the role which both private and public industry have played in the creation of it? Volatile demand is a symptom of a volatile economy which is perpetuated by the global financial economic crisis. Though it was thought for many years that the financial management of one firm does not manipulate an economy or market, but research conducted over the past decade implies that such economic volatility, an aggregate statistic, may stem from one firm’s behavior.  S&OP is one of the most popular current fixes to the risk of “demand volatility”, it seeks to maximize profitability through capacity production levels and logistical manipulation of inventory based on unconstrained demand. Planning to operate at capacity (when in practice freight and logistics capacity just isn’t there right now) in lieu of restricting operations planning based on demand forecasting does not put an end to demand volatility, and is not a long-term solution. This short term fix reduces supply chain visibility at the tactical level, increasing the likelihood of incurring unexpected social and environmental risks, and ignores costs crucial to management of sustainable and socially responsible organizations. Unconstrained demand planning shifts the responsibility of inventory management to operations as a risk responsive role rather than maintaining the function as a strategic (proactive risk management) role transferring the cost and waste burden onto the logistics and warehousing managers. This ignores not only the cost of additional logistics moves, surplus inventories, chargebacks, fines, stockouts, etc… It also completely disregards the added environmental and social costs which under a Scope 3 LCA would be assessed (including waste created by overproduction, excess emissions due to miles added to name two), and the cost of relationship strain and social irresponsibility which “swaps” and other profit maximizing, non-mutually beneficial profit maximizing strategies place on affiliates and contracted organizations. Not only does using S&OP without constraints increase production of waste, it also increases the risk of inaccurately manipulating financial data and altering the value of products. This type of quick fix may let an organization ignore demand volatility in short term financial reporting, but it is a suspect cause of the worsening global financial crisis, and instead of offering customers a solution for economic volatility it prolongs the existence of it.

Real risk management involves finding actionable solutions to the root causes of problems, it does not depend upon a PR cover up because it prevents potential problems from occurring. There are no circumstances where internal risk can be eliminated or reduced through the manipulation of externalities. Effective risk management focuses on reducing or eliminating an organizations negative impacts on not only the prosperity of an organization, but also on the environment and global community through internally implemented adaptations.