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The New Game of Supply Chain Risk Management

Pursuing high performance in uncertain times

For all its clear benefits and amazing advances, twenty-first century life is undeniably more complex.
No one knows this better than companies that rely on a chain of suppliers and service providers to deliver the goods and services they need to meet customer demand. That journey from source to destination has always had its risks and uncertainties. But never quite like this. Changes on nearly every front have dramatically altered the dynamics of the supply chain. Global sourcing and production, information and communications technology, consumer expectations, pricing volatility and product availability, financial conditions, regulation and compliance rulesshifts in all of these combine to make managing the supply chain a new game now. With new vulnerabilities. Consider those vulnerabilities. As companies source supplies and produce goods all over the globe, the extended supply chain now has additional points of potential failure. And as customers raise their expectations, companies are pushed into rapid-fire product cycles to stay ahead of consumer demands. But any disturbance in reliability and quality of supply will affect sales and erode loyalty and brand value. For pharmaceutical companies, the issues go beyond customer expectations. Patient safety and product security demand heightened supply chain integrity, especially as issues such as counterfeit drugs have become an increasing global problem. In this world, service becomes a differentiator. Still, outsourcing solutions, efficient as they may be, can compromise that. And for all players, information and communications have transformed the culture, making early dissemination of information a competitive differentiator. Then there looms one other major vulnerability in the supply chain: catastrophic events such as natural disasters. When the Iceland volcano erupted in 2010, for instance, Europes air space was shut down by the ash for weeks, disrupting supply chains around the world. The combined effect of these shifts is to make todays supply chain not so much a linear, one-way chain as a network of two-way relationships with operational risks in every strand. Risks at any one point have an impact on multiple other points. What happens on the raw materials side can have a downstream effect on everything else. What happens in manufacturing can have an upstream effect on the business as well as a downstream effect on distribution to the customer. To understand and manage the risks in this new interconnected supply chain, companies need one thing above all: a holistic view of risk across the enterprise. Without that overview of risks, the consequences can be costly. Even devastating. They range from mild customer inconvenience to a disaster that can damage the business, even bring it to a halt and jeopardize its continuity. Many companies have found that out the hard way. At a plastics plant, a worker accidentally tripped a shut-off switch causing a two-week shutdown costing millions in lost profit. At a global pharmaceutical company, the lack of a well-documented supply chain for a medicine put the business under fire after patient deaths and allergic reactions. A global auto maker had to halt production at all its factories in one country for a week because of earthquake-induced damage at a major parts supplier. Given this interrelated network of links and nodes, supply chain management without a full understanding of the risks to the enterprise is incomplete. It is no longer enough to manage the supply chain. Only with a riskintegrated approach can a company see the interdependencies in the supply chain and understand how making a decision in one function may affect adversely the entire organization. There are options on how to implement that. The risk capabilities may be stand-alone functions that drive management processes including the supply chain; or they may be institutionalized in some other way. But these capabilities must be present. At the same time, supply chain risks are operational risks and can be difficult to quantify or measure. But for any company determined to meet its objectives in a more predictable wayand ultimately enhance revenues risk management incorporated into supply chain management from top to bottom, across the business is not an option; its essential.

How are companies doing?

Critical as it is, supply chain risk is often precariously undermanaged at many companies. For understandable reasons, perhaps. The last several years have been brutal for the balance sheet and wringing out costs has been priority one at most companies. As a result, many supply chains are not thoroughly evaluating the risks in the business. This, even though supply chains now operate at higher risk levels as they are forced to do more with less. After optimization initiatives, there may be six links in the chain instead of 10; and indeed one or two of the omitted may have been redundant. But chances are some of the missing links helped to manage certain aspects of the supply chain risk. Consequently, the company could unknowingly be taking on a level of exposure that in fact has a more negative impact on the business than any benefits derived from eliminated costs. What supply chain risk management brings to the company is a balance of efficiency and effectivenessthrough
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an awareness of risk issues that need to be addressed. Risk management and optimization are of equal importance in managing todays supply chain. Both need a place at the corporate table as both will help ensure business success and resiliency. But even as they make serious efforts to manage supply chain risk, companies often approach it less than effectively. They may look at risks in siloed parts: procurement, logistics, distribution or manufacturing separately. What they miss is the network-wide view that would enable them to recognize similar risks that should be managed from a companywide perspective. Yet that is precisely where the value is. The value comes from being able to predict and realize how a decision in one function may affectpositively or negativelythe entire organization. And the impact of not proactively identifying, managing, monitoring and communicating key risks can be staggering.

That was exactly the experience of a large asset management firm. The sales team created a new 401K investment product for employees of a major corporate client. But the team failed to verify and understand the full upstream and downstream ramifications of offering that product. As it turned out, the asset management firm did not have the capabilities to deal with all the administrative, legal, regulatory, reporting and client implications of this new product. While the sales function did its job in creating an attractive product, the investment company ended up overwhelmed, its expected return on this product vastly reduced and its reputation damaged. Had the company looked at the whole supply chain that would be affected by that product from creation to client delivery, it would have realized there were serious risk issues to be addressed. On the upside, companies that stay on top of their supply chain risks make their businesses more resilient.

They can enhance the companys competitive position, support growth and produce measurable returns. That is the path followed by one rapidly growing global bio-pharmaceutical company. Poised to potentially double revenues in a few years, the company transformed its supply chain risk management. In just two years they moved from a highly personalized, silo-driven risk approach to one that institutionalizes the management of risks across the supply chain. The company realized that product safety and reliability must not be compromised at any point. To oversee that, they assigned global owners to any risk affecting multiple parts of the supply chain. No longer a silo-by-silo series of one-off efforts, this rapidly became an institutionalized, holistic, top-to-bottom management of supply chain risks. As such, it provides vital undergirding for the companys drive to sustain its rapid growth and expansion.

Moving forward in the new game

To stay ahead of the risks, companies pushing for high performance are taking more risk-adjusted approaches to their supply chain management. Realizing the stakes, they are looking closely at their supply chains with a view to enhancing fundamental strengths and addressing weaknesses they might have overlooked in better times. At the same time, they realize the business must be nimble. And quick to respond. The point, after all, is not to avoid risk. All business activities have uncertainties attached to them. The key is to understand and manage those uncertainties in a way that allows the company to reach its goals. The way forward, given the inevitable and necessary presence of risk, is to use supply chain risk management to take those risks in a smarter, more informed way.

Much as one network-equipment industry giant did. By driving hard to use risk management as a competitive supply chain differentiator, this company achieved top-three ranking in the supply chain risk management field. One major consumer products company leveraged supply chain risk management to beat the market averages in growth. It succeeded, gaining number one status in two of its primary product categories. As companies transform their supply chain risk management strategy and approach, they obviously do so against a backdrop of unrelenting performance and competitive pressures. Reducing costs, developing new markets, focusing resources on core valueadding activities, addressing complexitythese dominate corporate agendas. But these initiatives come

with their own risks. Outsourcing of activities, for instance, though cost efficient, increases the chance of delivery delays as third parties execute more of the core logistics activities. Still, fierce competition and a difficult economy create an imperative for a company to use every source of advantage. And for many, holistic supply chain risk management remains one advantage yet to be tapped to its fullest potential.

How can companies copeand compete?

To adjust to the risk interdependencies in the supply chain, some companies, especially those in consumer goods, are evolving new operating models to help address risk. They are scrutinizing global vs. local processes to determine which functions should be centralized and which should be managed locally, with guidelines, given the risks. To be effective, this new supply chain modeling depends on the right level of risk information and companies are systematically considering and/or using predictive analytics to provide that. Robust and sophisticated vendor management is another corporate response to heightened risk in the supply chain. Rather than rely on one supplier, dual sourcing is used, especially for critical components, or multiple sourcing in a tiered approach to suppliers. Critical suppliers may be managed with specific contractual

obligations and a more active level of monitoring and relationship management. There may be integration through technology. And to stay ahead of any changes in the risk profile, vendor information is kept up-to-date. Communication is continuously open to understand the current financial and operational health of key suppliers. Second-tier suppliers are also managed closely because they may at any time become critical to operations if firsttier suppliers fail. With any critical supplier, regular negotiations are part of the process. Likewise, risk sharing. If a specified event should occur, many companies spell out what risks will be shared with critical suppliers, including both financial and operational risks. Inventory staging may also be included.

Risk is becoming part of the daily journey of people in the supply chain and these are some ways companies are anticipating and managing risks before they get out of control. What becomes clear is that effective supply chain management requires more than efficiency and optimization of processes. To work, it must become something new, something more and in a holistic way address the unrelenting swirl of uncertainties that have an impact on the business.

Accentures approach

The goal of supply chain risk management is to make sure effective mitigation strategies are in place all along the value chain. The point is to create value for the organization and Accentures approach is to manage supply chain risk as a business issue not a standalone concern. In this approach, corporate attention and resources are focused on beginningto-end solutions that support riskbased decisions for the good of the whole enterprise. In Accentures view, the highperformance company from here on will approach all the components of the supply chainprocurement, logistics, manufacturing, planning and all othersas a unified whole. Certainly each of these will carry its own particular risks and associated measurement and metrics. In addition, the finance function often owns credit, operational and liquidity-related risk management areas. But there are also common operational and strategic risks that stretch across the supply chain and these will need to be aggregated from the beginning of

the supply chain to the end. Including vendors and the vendors vendors. With a full understanding of upstream and downstream effects, and how mitigation actions at one point affect risks across the business. From our work with clients around the globe and comprehensive and ongoing research, Accenture sees that companies move toward high performance in supply chain risk management in a three-part approach. 1) Assessing supply chain risk; 2) Designing a framework to manage supply chain risks; and 3) Implementing that framework to proactively address supply chain risk. Here is a look at each.

vendors and counterparties. Make sure you understand who your partners are. What is their operational and financial risk profile? If you are counting on supplies from a vendor, what happens if you dont get those raw materials? Reliable delivery here depends not only on the vendors financial condition but also on that vendors risk management processes. Managing your companys risk exposure requires clarifying this overall risk picturewithout overlooking any points. In developing a sourcing strategy for this extended and interconnected supply chain, the fundamental tasks remain. They include assessing risk, selecting suppliers and partners and managing established relationships and processes. Making an inventory of key risks is always required, and evaluating their potential impact and the likelihood of their occurrence with riskquantification tools. Its about more than probability and magnitude, with factors like detectability, detection lead-time, time to recover, and cost to recover separating resilience success from failure. How skillful the company
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1. Assessing risk
It all starts with assessing supply chain risk. But first, some basics. Exactly what do you mean by your supply chain? Define its components. Define your suppliers, the players that come in and out of the process across the entire supply line. Look at third-party

can carry out these fundamentals, starting with assessment, is now much more important. Consider the company that decides to move into an emerging or frontier market. Here companies face a whole new order of risks. Lets say the goal is to grow 15 percent this year by launching products in three new markets. There will be capital investment. Perhaps a distribution facility, a factory, retail stores. To understand how to operationalize the companys capabilities in that environment requires looking at risks across the whole supply chain backwards, forwards, up and down. The financial analysis might lay out the best, most-likely and worst-case scenarios, but often this has little to do with the operational and strategic risks involved. Often not factored in are the labor force, political, regulatory and other issues that may add hugely to costsand deflate those financial projections. Yet as they move into these unfamiliar markets, many companies do so flying blindor with eyes only partially open.
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But assessing risk, important as it is, is just the beginning of a holistic approach to supply chain risk management.

down the corporate hierarchy and across business units. The framework applies to many risks in many areas. It is a consistent, standardized approach. It applies to logistics, procurement, production and many other activities, at any level in the organization. The critical aspect is that this framework aligns risk-based decisions with overall corporate and related supply chain objectives. By understanding all its supplier interrelationships and interdependencies, the company can manage supply chain risks with a proactive view rather than with afterthe-fact response. Five process pillars support this risk-based decision making. They are:

2. Designing a framework to manage the supply chain


Once assessed, supply chain risks need to be managed via a framework that integrates all of the key risk capabilities required. Designing a framework to provide that means embedding risk considerations into all business operations and linking them with important business processes. From deep global experience as well as extensive research, Accenture has identified the key components that go into enterprise-wide, risk-based decision making. They are incorporated here into our risk management framework. The framework considers the risk that lies along the entire supply chain from design to delivery of the product to the customer, and possibly the return back to the supplier. It puts in place the structure to assess, evaluate, analyze, manage and monitor risk from up and

Organization and governance


The complexity of the supply chain and the organizations goals and objectives may vary in each company, but one risk management basic is constant. There must be a well-defined organizational

structure with explicit roles and responsibilities to manage risk. Only this way is it possible to direct and track decisions at different points in the organization. The companys governance structure might be a risk committee, an independent risk management function or a supply chain risk management functionwith supporting policies and procedures. Whatever form it takes, a governing body will review progress and emerging trends as well as results. It will provide counsel and be authorized to direct reallocation of resources if the risk picture so warrants. Supply chain risk management efforts have a direct impact on business results. A strong governance structure makes it clear where responsibility for those results is focused. It identifies risk ownership in the organization.

are they assessed and measured? How is the action planning process implemented and monitored? What monitoring activities are in place to ensure risks are being managed and action plans are followed? Are there proactive risk aggregation activities to ensure: 1) risk interdependencies are taken into account and are managed; and 2) costs for managing risks are leveraged effectively? Have risk appetite and risk tolerances been defined and socialized throughout the organization? These risk management processes must be consistent throughout the organization and link operations with other important business processes.

where an operational risk appeared and correlate it to management initiatives. In launching a new activity, its possible to mine that data to see what made for success. What supply chain risks did the company really manage well? That can be predictive of how the company will do in a new but similar effort, how long it will take and what impact it will have on the balance sheet. Qualitative methodologies can assess effectiveness. Quantitative measures address linkages between risks and operational performance. Powerful analytical risk management tools and techniques are readily available for this, including becoming more predictive and hence more resilient. They can not only mitigate risk but also provide insight on opportunities. To enhance the companys ability to leverage risk for business advantage, metrics matter.

Risk Analytics
Every company needs a robust methodology to identify, measure and monitor its operational risks. The right analytical tools quantify the impacts of uncertainty. They sharpen the companys view, providing stronger capabilities in supply chain risk prioritization, risk measurement, scenario analysis and stress testing. Analytics and metrics allow a company to see when and

Risk Management Processes


Is there a process for identifying critical supply categories? Are vendors segmented to identify and prioritize those critical to business continuity? What risks are captured and how

Risk Reporting
Many companies produce voluminous reports, but are those reports focused and relevant? Do they deliver key information in a timely way
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information essential for effective supply chain risk management? What reports are you looking for and how can you use them? What data do you need to capture to be able to produce those reports? Once the data is captured, what types of analytics are necessary to predict an identified event or risk in your supply chain? Answers to these questions form the backbone of the companys risk reporting framework. Reporting should also include metrics on current supply chain risk management efforts, changes in the risk environment, and indicate when intervention is required. And importantly, the companys risk reporting needs to be visible to top management. Reporting should be structured to ensure visibility on key risk and mitigation strategies, in accordance with an overall enterprise risk management strategy. Too often supply chain risk management reporting is limited in its distribution, leaving top management insufficiently informed
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on what risks are being raised and how they are being controlled.

Information Management and Data Governance


In the interrelated network that supply chains have become, managing supply chain risk depends heavily on information at hand both internal and external. To maximize performance, companies must synchronize processes, streamline material flows and coordinate across organizational boundaries, processes and regions. The only way to do that is by managing and making transparent the companys dominant asset: information. Communicating out, up and across the supply chain strengthens the risk-based decision making that is the goal of this framework. Bad news, good news, it all has to be communicated immediately in an open and transparent culture. For one point in the chain to sit on information is harmful to the entire company. What this framework does is take a company from yesterdays linear

supply chain where each point was its own center of the universeto holistic, continuous and proactive management of supply chain risks. What emerges is a vital, enterprise-wide picture of risk that informs better decision making.

3 Implementing supply chain risk mitigation


Designing an appropriate risk management framework ensures that effective risk mitigation strategies are in place. Of course to work, those strategies must be implemented. For that, the company needs a robust action plan. A plan funded with appropriate resources to address the core of the risk issues and implement treatmentnot just symptomatic relief. The value, after all, is only realized when the framework is implemented. The value of the right organization and governance framework, for instance, can be in alerting the company to recurring risk in the organization. It can expose a common risk or identify an exposuredriving action. It might

be something as simple, and at some companies potentially crippling, as the projected truck driver shortage in the United States. That is expected to reach 111,000 in 2014. When it comes to information management, the value is in capturing enough data to recommend profitable strategies. Data can be produced that tells management, if we manage these five areas well, if we deal with these 20 risks well, we can expect these results. Information becomes more predictive and eventually has financial impact. With open and transparent communication, the value is in driving superior performance. Planning or manufacturing may be alerted to a potential problem on the logistics side. If there is an issue around shipping freight, red lights are set off. Thats the kind of information one major high-tech company needed to know when a fire at an overseas manufacturing facility compromised its ability to meet demand and contributed to a $1.7 billion loss for the year. Does the company have sufficient backup inventory? If not, how

does it plan to live up to contractual guarantees or maintain the companys standard of reliability? A comprehensive, top-to-bottom action plan gives direction to supply chain risk management. It enables a new, risk-based decision making to permeate the company. It becomes, in short, simply the way the high-performance company does business going forward. In putting that beginning-to-end action plan to work, companies will want to look at best practices. Here are some that support the high-performance companys ability to mobilize its risk-management framework effectively. Obtain buy-in from the top of the organization. Integrate supply chain risk management practices across all business functions to ensure understanding, commitment and alignment. Integrate Enterprise Risk Management principles. Identify, measure and prioritize risks through mapping out of the supply chain

ecosystem and rating of key risk areas based on likelihood, impact and other key factors. Implement dynamic supply chains. Develop flexible operations, a diversified supplier portfolio, global visibility, and options to scale and contract so as to minimize disastrous event impacts. Simulate potential scenarios. Use probability modeling to identify unknown risks and develop contingency business continuity plans. Incorporate comprehensive quality management. Enforce quality management for supplies and finished goods through all supply chain processes to ensure optimized quality and efficiency. Employ robust partner risk management. Manage supplier and service provider risk by performing upfront due diligence. Set clear expectations in contracts. Hedge risk by intelligently obtaining insurance.

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Accenture and your next moves

Two points summarize our message here. One, a business that aims for high performance today, and even survival tomorrow, must be acutely aware of the array of interrelated risks all along the supply chain. And two, it must manage those risks in a holistic way to support risk-based decision making across the enterprise. That calls for effectively merging the perspectives and processes of supply chain management with the risks and uncertainties identified in supply chain risk management. Certainly supply chains have always required managing uncertainty and risk. But today that risk component has a never-before impact on the ability of the company to achieve its goals. That drives supply chain management and supply chain risk management to become a hand-inhand effortwith the resiliency of the business on the line.

From global work with clients, from deep experience in supply chains and supply chain risk management, Accenture has a strong understanding of how to help organizations manage the risks and support the continuity, the profitability, the resiliency of the business. We can help you bring it all together, from beginning to end. And in the end, help you build a company that is ready for the next uncertainty, the next unknown.

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About the Authors


Michael Chagares Michael is executive director Risk Management, cross industry lead based in Washington, D.C. Michael has more than 20 years of experience as a consultant and banker, providing business and enterprise risk management services to large companies in a variety of industries including healthcare, pharmaceuticals, biotech, manufacturing, construction engineering, hospitality and real estate. His specialization in Enterprise Risk Management (ERM) and extensive experience in assisting clients design, develop and implement customized ERM frameworks and infrastructures helps them become high-performance businesses. Daniella Datskovska Daniella is a senior manager - Risk Management, based in Washington D.C. With over 13 years experience in industry and risk management consulting, Daniella has proven capabilities and skills in planning and directing large scale enterprise risk management initiatives form current state analysis and assessment to overall design and implementation. Her solid financial analysis background, governance and compliance experience, global market experience, and specialized in enterprise and operational risk management, Daniella helps clients on their journey to becoming high-performance businesses.

Jade Rodysill Jade is senior director Supply Chain Management, based in Dallas/Fort Worth, Texas. Jade has more than 16 years of experience as a consultant, business development director, and operations manager, helping clients in chemicals, natural resources, energy, industrial products, transportation, and communications industries improve their performance through innovative supply chain strategies and solutions. His experience across the supply chain planning, procurement, production, and fulfillment and focus on building supply chain resilience for clients through improved monitoring, management, and mitigation, helps organizations become highperformance businesses.

Giovanni Giacchetti Giovanni is a manager, Supply Chain Management, based in Milan, Italy. He has broad experience in the areas of Sourcing and Procurement, including Strategic Sourcing, Supplier Development, Performance Management and Commodity Management. With a focus on Procurement Risk Management, Giovanni helps major companies implement successful Supplier Risk Management models and Commodity Risk Management Analytics. Working mainly with Consumer Goods, Industrial Equipment & Retail clients in the manufacturing sector, Giovanni helps these clients become highperformance businesses.

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About Accenture Risk Management


Accenture Risk Management consulting services work with clients to create and implement integrated risk management capabilities designed to gain higher economic returns, improve shareholder value and increase stakeholder confidence.

About Accenture Supply Chain Management


Accenture Supply Chain Management consulting services help clients develop more dynamic supply chains by aligning operating models to support business strategies, optimizing global operations, and enabling profitable product launches.

Copyright 2011 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with approximately 211,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.

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