An Analytics Approach to Supply Chain Risk Management

Risk management is no stranger to CFOs whose job it is to guard their companies against surprises and crippling business failures.  Much of that job is to measure the company's susceptibility to failure by constantly looking at the threatening factors, which are sometimes easily overlooked if accurate, update-to-date information is not available.  In many cases, that means looking below the surface of the topical data to underlying causes. 

The competitive business environment today has dictated a reduction in value-adding processes inside the four walls of the company by outsourcing larger portions of the manufacturing process to more specialized suppliers or to lower cost countries that are more environmentally liberal.  This means a major part of the business risk has shifted to the supply base - a base that is pushed to produce the best quality, in the shortest time, at the lowest cost, and while distanced by sometimes unpredictable logistics networks.  Many companies are finding that the supply chain management department must own a part of the company's overall Risk Management program, the value of which has been painfully driven home by 9-11, hurricanes, tsunamis and the Long Beach strikes. 

If this is the case and the pace of business is increasing, how can companies reduce their risk of failure?  The answer is not only to address the low frequency catastrophic failures that in many cases require rethinking or redesign of the supply chain, but to manage the higher frequency, lower impact failures that create a gradual decay causing both service and cost failures. 

The challenge is to look deeper and wider than conventional supplier analysis and to develop a means of measuring and monitoring a supply chain risk profile through a risk index that ...