Nadia Borowski Scott
THE ‘WHAT IF?’ APPROACH Gary Lynch, a managing director in the risk consulting unit at Marsh, advises risk managers to think about potential remedies to supply chain failures.
Years ago, such risk entailed a shortage of raw materials or late deliveries because of transportation problems. But it has now grown to include everything from natural hazards or disasters to terrorism, pandemics, political unrest, labor problems or the loss of computer data by a vendor.
In most cases these are risks a company can't buy insurance for, even though any one of them could ultimately result in the destruction of a company's brand name, reputation and stock market value. Some companies are even putting pressure on their suppliers to have enterprise risk management plans in place (see “Supply Chain Only as Strong as Its Weakest Link,” FW, April 21).
Addressing and planning for supply chain disruption in an organization's various firms is essential, but it has to come at a reasonable cost, said panelists at the Risk and Insurance Management Society conference in San Diego last week.
“Clearly, it's about managing volatility within certain parameters or thresholds that you have set,” said Gary Lynch, a managing director in the risk consulting unit at Marsh, “but the risk profile constantly changes” so it's imperative that it be monitored for effectiveness and efficiency, he said.
Adding to the challenges is the fact that risk managers view the issues differently than do the company's supply chain managers, said Pamela Britt Schneider, director of global risk management for Avon Products. “Often, they have competing priorities,” she said.
For example, supply chain managers seek to consolidate vendors and reduce inventory in order to cut costs, while a risk manager wants the company to do the opposite, building in redundancies so that there are alternative sources of product in the event of a disruption.
So it's imperative that risk managers and supply chain managers understand each other's roles, Ms. Schneider said. She suggested that those risk managers try to “become an insider” on the supply chain management team, learning its priorities and how the supply chain works, while simultaneously identifying its vulnerabilities.
“Tell them you want to help them reach their goals and avoid disruptions,” she counseled, adding that at the same time, risk managers must balance that with preparing plans that will sustain the business in the event of a problem and be familiar enough with the issues to take on the role as the firm's intermediary with the insurance company when presenting a claim linked to a supply chain problem.
But one growing problem is that, given the weakening economy and tighter budgets, it may be harder for risk managers to sell the importance of risk management's role to senior management.
So supply chain managers need to build their presence in the C-suite by communicating potential problems to them regularly. One way to illustrate the significance of those risks is by presenting news clippings of recent supply chain catastrophes at other companies and their impact, said Ms. Schneider.
Among Marsh's suggestions are that risk managers create a supply chain risk team that looks at the supply chain end-to-end. Mr. Lynch said Marsh has found that one approach to helping companies find alternatives in the event of a supply chain failure is to tell supply chain managers to bring a “what if?” mentality to their duties. That is, have them constantly asking themselves that question so they have a potential remedy in mind in the event of a supply chain failure. “This approach is not only effective but also highly practical, given the limited resources of most corporate risk departments.”
“Nearly three-quarters of risk managers say their companies' supply chain risk levels have increased since 2005,” according to Marsh's survey of 110 corporate risk managers in January and February.
“[So] for most risk managers, the question is not if they should take on this responsibility but how to do it, given constraints on resources and time,” the Marsh report said.
Avon may be one of the most international of U.S.-based companies, as 75% to 80% of its $9.9 billion in sales last year were made by its direct-sales force, perhaps the world's largest, the majority of which is international.
Its scope includes sales operations in 66 countries and distribution of its products in an additional 48. It has 1,500 direct vendors globally, uses 10,000 different raw materials to produce its beauty products and processes 20,000 product orders daily, said Ms. Schneider.
Add to that the fact that most of its products are produced by third-party manufacturers, and Avon maintains worldwide warehousing, distribution and shipping logistics and one can see that Ms. Schneider is involved in a truly daunting enterprise fraught with challenges from within and without.
Ultimately, “in a post-Mattel world, you have to ensure that the products you are selling are safe and are fully tested for your customers,” said Ms. Schneider, referring to the massive toy recall and subsequent negative publicity the toy maker faced, because excessive amounts of lead were discovered in paint on some of its products.
Source: financialweek.com
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