Four Questions About Risk Mitigation Strategy

Although everybody is acutely and hyper aware of risk, very few companies are setting about to develop an end-to-end risk mitigation strategy. Industrial Distribution recently had the chance to speak with Wade McDaniel, the Vice President of Solutions Architecture at Avnet Velocity, about what distributors can do to mitigate their risk in an ever-changing global supply chain.

Id 1164 The Iron Broken Chain

Industrial Distribution recently had the chance to speak with Wade McDaniel, the Vice President of Solutions Architecture at Avnet Velocity, about what distributors can do to mitigate their risk in an ever-changing global supply chain.

ID: What kinds of risk are supplier facing in the modern supply chain?

McDaniel: Lots of suppliers rely on multi-source distribution, which opens them up to more risk throughout their supply chain. Generally, I view risk in two major categories:

  1. supplier risk management
  2. process risk management

On the process side, you are looking at de-risking your sales and operating planning, your internal processes, warehouse processes, transportation processes, and things of that nature. Supplier risk management is quite a bit different. Now, a lot of companies are wanting to take a look deeper into the supplier’s supply chain. If someone is making or selling something, whatever that something is – they have got a multiple layer supply chain behind their product. That is looking at risk mitigation in the supply base, which is really important to distributors since once that supply chain is disrupted, your source of revenue is largely cut off. Once it is broken, it is broken.

ID: How do you suggest then that companies start a supply chain risk management strategy?

McDaniel: This has been a hot topic. With small to medium companies, let’s say $2M to $500M, you are probably not going to have a risk management function at the company. You are not going to have an operational officer specifically in charge of risk management. That said, there are a couple of different ways of looking at supply chain risk management. The way we are recommending is that you take the supply chain reference model – the SCOR model. The Supply Chain Council has a strategy of looking at each individual aspect of the chain: Plan, Source, Make, Deliver, Return.

If you focus on these five things one at a time, that gets you end to end supply chain risk management. The first step is that companies should look at their maturity in each one of these categories – in terms of risk mitigation.

Assessment is the first thing in each one of these areas. Then you can start developing a strategy downwards from there. For instance, if you realize that your company doesn’t have integrated processes with your suppliers. Looking at the potential risk, you decide what you need to do to eliminate or dampen that risk. The process is going to be individualized for each company.

The general idea right now is not to try and focus your energy on 100% of your suppliers. Focus on the ones you do the key business with, usually following the 80/20 rule: you get 80% of your revenue from about 20% percent of your parts or widgets. You are going to want to make sure that the security and risk of those components is fully vetted.

If you follow the SCOR model, that is your sourcing, your suppliers, then you take a step back and look at your planning model. How robust is your planning model? Look at your customers and how their buying behaviors affect it. Look at the way you do demand management, and take a look at how you proof those processes. You just keep going through that circle – Plan, Source, Make, Deliver, Return – and it’s a continuous cycle. Then you go deeper and deeper into each one, until you have an actionable plan in place.

ID: Who needs a risk management strategy?

McDaniel: Everybody. Everyone already does it to one extent or another. They may not formalize it as a strategy, but they have one. Safety stock is a risk mitigation strategy. In the simplest of terms, you can say that this supplier doesn’t perform very well, so I am going to have to keep some safety stock. It’s a notion decades old. That is one very simple tactic of risk mitigation. You plan for earthquakes and floods – everyone does it, just not everybody has a strategy for doing it across the enterprise.

Absolutely everybody needs a risk management strategy – they can’t afford to have their business interrupted. The notion is that risk and risk strategy is going to become like “quality” – all of the industry got on the big quality bandwagon back in the ‘80s. We see risk strategy as becoming the new quality. Everyone does it; everyone has it; it will just depend on how robust the systems are for individual companies.

ID: Why do you say this is an onset that we are seeing now? Is it the globalization of business? What are the big factors influencing this need?

McDaniel: Bad stuff has always happened. Ships sank with goods on them, natural disasters took towns out. That has been happening since the beginning of commerce. I think more so, in the past ten or fifteen years it has become so quickly seen and understood. There is an earthquake in Japan and it is no longer just a disaster, it is a supply chain disaster. Now we are no longer getting cars from Honda and Toyota because the key ingredient in their paint is from a guy in the northern region of Japan and it was a single sourced part. Nowadays, supply chain interruption is so widely seen and understood that it draws a lot of attention to it.

Some other research from Kevin McCormick points to the fact that although everybody is acutely and hyper aware of risk, only ten or fifteen percent of the companies that he has researched are setting about to develop an end-to-end risk mitigation strategy for their company. Gartner is also quoting the same figures, too. Everybody is hyper aware, but not a lot of people are doing stuff about it.

Wade McDaniel is responsible for leading his team in designing and implementing solutions for Avnet and its customers focused on supply chain engineering, supply chain finance, warehousing and transportation logistics worldwide. McDaniel, along with his team, designs end-to-end supply chain solutions to help Avnet and its customers manage the global flow of information and products. This includes managing trade issues – trade finance, which often requires working with banks in different parts of the world; customized IT; as well as supply chain and transportation management. For more information, please visit www.avnet.com.

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