Despite global competition for supply, too many businesses are lagging behind the competition on the risk management front

Our global food supply chains have suddenly become risky. Be it the impact of a cyclone in Burma, food miles in Chile or biofuels in America, the daily headlines warn of burgeoning global supply wars. 

Yet despite the growing cost and scarcity of raw materials, 45% of organisations are failing to assess and manage risks in their supply chain, reveals research conducted by Aon and State of Flux. This, in our view, is leading to a worrying new breed of 21st-century ‘laggers’ who could face major supply chain disruption if they don’t take action soon. So what action should they take? 

First of all they need to understand the nature and scale of the problem. As the global competition for supply intensifies, companies will more often find themselves losing out to the highest bidder – aka China – for raw materials and looking to multiple sources to satisfy their requirements. They will need to work on scenario planning around the failure of the supply chain.

The true leaders will be the ones who create resilient and agile supply chains by understanding their risk exposures and identifying any inefficiencies in their supply chain that need to be addressed. 

It may sound obvious, but another quality that will single out the best from the rest is the ability to communicate effectively. How many businesses can honestly say their supply chain, procurement and risk management teams truly work together? 

Not many. That’s going to have to change. Our survey suggests there is a bow wave coming in terms of the level of scrutiny suppliers are going to be subjected to by customers. This is already happening on the environmental and social fronts. The next big issue is going to be business continuity. British Standards issued BS25999 on Business Continuity in 2007 and it has already been adopted as a national standard as far away as Brazil. Supply chains are under pressure to tighten up performance.

Organisations that want to keep ahead need to be sensitive to these issues and respond proactively. These will be the businesses best placed to survive a major incident. By encouraging risk awareness across the business, they will be able to spot problems before they occur. 

When evaluating new suppliers, they’ll be the ones ensuring procurement works alongside the risk professionals to consider political, economic and physical risks.

The way organisations think about and manage risk is changing. Companies are waking up to the fact it won’t be a factory fire that puts them out of business, it’ll be the financial failure of a supplier, a data security breach or a major product recall. These have the potential to impact brand and reputation much more significantly. And in an outsourced world, brand is what is most at risk.

It is often said that you can only manage what you measure. Key performance indicators need to be put in place to manage supply chain risks. Only then can businesses start to understand fully what ‘good’ looks like.

Nothing is going to happen unless corporate culture changes. To create an agile and resilient supply chain, companies need to work at it. It is not until risk thinking is embedded in procurement functions that any real improvement will occur. This requires a more collaborative approach within and across organisations, which is the real challenge.n

Alex Hindson is head of enterprise risk management at Aon