Mature Supply Chain Risk Management Yields Better Performance

Managing Risks Across a Global Supply Chain

When an organization expands into new markets around the globe, the exposure to risks can grow exponentially.  To capture value opportunities, strategies need to align with differing economies, requiring products and services that differ across separate markets. In turn, that kind of expansion leads to new supply chains entirely, which triggers all kinds of unexpected risks along the way.

A recent study by the MIT Forum for Supply Chain Innovation and PwC examined supply chain operations and risk management approaches for 209 companies that have a global footprint. The study finds that maturity in both supply chain management and risk management can position companies to outperform the market and gain competitive advantage.

The report suggests companies need to consider the following questions:

1. What are the drivers of supply chain complexity for a company with global operations and how have they evolved over recent past?
2. What are the sources of supply chain risk?
3. How can vulnerability and exposure to high impact supply chain disruptions be properly assessed and managed?
4. How can supply chain resilience be improved?
5. What supply chain operations and risk principles will guide the improvement of the company’s bottom line: the operations and financial performance?

Answering these questions is the first step to creating an effective risk management process to ensure a successful supply chain. 

Assess Maturity of Integration of Supply Chain and Risk Management
Levels of Maturity in Supply Chain Operations and Risk Management

Supply chain operations and risk management processes complement one another thereby making the maturity of each important. Thus, assessing where the organization in its integration of supply chain and risk management, it is important to identify where it falls on the maturity curve.

At the lowest level of maturity there are usually uncoordinated efforts between suppliers and partners, high duplication of activities, and little visibility into partners’/suppliers’ operations. As for risk management, normally there is no risk governance structure and limited analysis of the company’s vulnerability to threats. Research indicates that 59% of the companies surveyed have immature processes in place to address such incidents.  

The highest level of maturity is much different. The supply chain is very flexible and can adapt to complex dynamic environments. This enables the supply chain to match multiple customer value propositions and be fully aligned with supply chain partners. In risk management, this level of maturity has risk sensors in place for real-time monitoring and analytics. Also, risk strategies are segmented based on supplier profiles and market-product combination characteristics in order to accommodate to different value propositions. These capabilities allow for quick response and adaptability to risks that could affect a company’s supply chain. PwC and MIT’s research shows that only 9% of the companies surveyed are fully prepared to address potential challenges from supply chain disruptions. 

The study suggests that there are seven factors that companies can use to assess the maturity level of their capabilities:

1. Risk governance; 
2. Flexibility and redundancy across the value chain; 
3. Alignment between partners in the supply chain; 
4. Upstream and downstream supply chain integration; 
5. Alignment between internal business functions; 
6. Complexity management/rationalization; and 
7. Data analytics. 

Of these seven factors, the MIT/PwC study shows that 60% of companies surveyed consider alignment between partners in the supply chain as the most important in enabling risk reduction.

Supply Chain Risk Maturity Leads to Better Performance

Companies with mature capabilities in both their supply chain operations and risk management processes suffered lower impact from risk events and recovered more quickly. Forty-four percent of companies with mature processes suffered a 3% or more decline in revenue compared to 57% with immature processes. Organizations with mature processes have a higher resilience according to all the key performance indicators examined (market value, revenue, market share, etc.).

Investing in the flexibility of a supply chain is critical to a company’s ability to adapt to change and allows the company to be more resilient to disruptions than companies without flexibility.  In comparing a cost-efficient group of companies and a flexible-response group of companies, the flexible-response group had significantly better performance resilience. Eighty percent of the cost-efficient companies faced high variability in their supply chain lead times – the time from the moment a customer places an order to the moment it is received by the customer – when a supply chain disruption occurred. This is a significant issue because low variability is one of the key drivers of an efficient operating strategy.

There is a direct link between having mature supply chain and risk management capabilities and higher overall performance. This study shows the difference of operational and financial performance between companies with mature and immature capabilities. According to the study, mature companies performed better in all aspects that were surveyed including EBIT margin, supply chain lead time, and inventory turnover among other performance indicators.  

Mature Supply Chain Operations and Risk Management Processes are Worth It

As this research illustrates, mature capabilities result in better prepared companies when facing disruptions to their supply chain. The key factors to an effective supply chain are flexibility, transparency between partners, and segmentation to match multiple customer value propositions. Furthermore, the key factors to a mature risk management process are real-time monitoring and analytics, formal but flexible risk governance, and segmented risk strategies based on supplier profiles and market-product combination characteristics. Overall, mature supply chain operations and risk management processes lead to better operational and financial performance.

This abstract was based on the following study:

“Supply Chain and Risk Management:  Making the Right Decisions to Strengthen Operations Performance,” MIT Forum for Supply Chain Innovation and PwC, by David Simchi-Levi, Ioannic M. Kryatzoglou, and Constantine G. Vassiliadis.

Click here to download study.