When last year's massive earthquake hit Japan, the effect on electronics production was severe, and it also resulted in extended business disruptions for many in the automotive industry. When Thai flooding created significant shortages in the hard disc drive market, manufacturers lost millions of dollars. When ash clouds from the Icelandic volcano darkened the skies over Europe, planes were grounded, interrupting business travel and disrupting air freight. And, when political turmoil in Egypt, Libya and elsewhere in the Mideast erupted, many businesses could only watch and wait to learn what it would mean for their supply chains.
In an uncertain and volatile world, risk management ? a previously unsexy subject for many managers who created annual updates or reviews of their company's risk management plans ? is now a front-burner issue for many. This is especially true in supply chain risk management, although those high-profile one-off events do not necessarily represent the largest portion of risks that should be addressed regularly by supply chain managers.
Generally, the experts trying to address this issue take for granted that risk is a cost managers want to avoid and portray risk management as an attempt to avoid this potential cost. This assumption may be fundamentally flawed.
Risk in supply chain is not a potential cost ? it is an actual cost, very real and borne by every product and service company, whether they understand it or not.
Let's start by defining what we mean by risk, which is simply the possibility of more than one outcome (of unequal values) to a given future state. The possibility of more than one future outcome can very easily generate a cost in the present. How so? Because the fact that value is not guaranteed in the future lessens value in the present. This reduction in value is present and represents a cost today, not tomorrow. This is a concept fundamental to finance but that, for some reason, has not migrated into supply chain risk management.
Furthermore, that cost can take two forms: accounting and economic. The former refers to costs that are visible and recorded within the company (e.g., higher capital costs, business continuity insurance, dual-tooling in manufacturing) and the latter refers to costs that are not always visible or recorded but exist nonetheless (opportunity costs of not entering a risky market, concentration risk in the supply base, reduced valuations, etc.).
If one accepts that risk is a cost, then risk management is simply the reduction of the cost of risk. These supply chain-related risk costs are present every day that managers come to work. And yet almost no discussion of supply chain risk management deals with the reduction of these present costs in a systematic, quantitative way.
On the contrary, the typical supply chain risk management discussion focuses on low probability, high impact events, such as the natural disasters or political uprisings referenced above ? to capture your attention.
Yes, such events hinder commerce and provide interesting fodder for discussions. But they actually are arguably less relevant to supply chain performance than everyday issues. For instance, optionality reduction in procurement contracts that accept excessive risk cost, or uncalculated and possibly dangerous risk costs inherent in the basic supply chain design of a given company, such as the mandate of a low-cost model with no ready replacement in the case of a serious escalation in its risk profile.
A problem is that supply chain managers are rarely trained in quantitative risk concepts, either during the formal phase of their education or on the job. Risk is an abstract concept and hence often an uncomfortable topic for executives who make their living in the all-too-physical world of procurement, manufacturing and logistics. The same can be said for traditional supply chain risk management consultants and academics, who, after all, share a similar background. This lack of comfort with both the quantitative aspects of risk and the more sophisticated options available to operational executives is (in some industries literally) dangerous. Indeed, anyone who claims to be managing supply chain risk without understanding subjects like real options, hedging, Value at Risk models, financial simulation, and so on, is more like a security guard than a real risk manager.
In addition, there is often a knowing-doing gap between enterprise risk management teams and the business itself. At a typical firm, the enterprise risk management team is eager enough to point out the many risks that a Chief Procurement Officer or Chief Supply Chain Officer faces but the risk team is often reluctant to join the CPO or CSCO's team to tackle those risks directly. The operational executives, for their part, when confronted by a subject that typically neither they nor their teams completely grasp, all too often come up with little more than a contingency plan and then sit back and hope nothing goes wrong ? meanwhile, excessive risk costs continue to reduce the company's present value.
CEOs and CFOs should consider rethinking who is managing risk in their global supply chains. A literal revolution should be considered in the field of supply chain risk management. The good news is that it is coming, little by little, as leading thinkers in industry, academics and the insurance/risk industry itself rethink this topic from top to bottom.
Many leading companies are already moving in this direction, adding finance PhD's and actuaries to procurement and supply chain teams. This new generation of risk leaders has an opportunity to transform the discipline of supply chain risk management from a reactive planning exercise to a day-to-day operational function. This is a strategic shift; insightful CEOs will move their companies in the same direction now rather than in years to come.
###
Source: http://blogs.hbr.org/cs/2012/11/why_quants_should_manage_your.html
serena williams blake lively RG3 Espn Fantasy Football Grandparents Day 2012 army wives 60 minutes
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.