Don't play it safe...

'Don't play it safe when it comes to Supply Chain Risk Management' - that is the title of Accenture's new 'global operations megatrends study'. The analysist at Accenture took a look at SCRM to identify the current top risks for supply chains and also the functions or areas within a supply chain that seem to be most at risk. Accenture also aims to highlight some best-practices top companies are implementing when it comes to setting-up and effective SCRM.Thus, let's take a look at the results of the study...

The respondents that were contacted within the survey are more than 1,000 senior managers; most of them are from large global companies from all over the world.

Figure 1: Greatest sources of supply chain risk, source: Accenture: Don't play it safe when it comes to Supply Chain Risk Management, 2014, p. 5.

When focusing on the top souces for supply chains risks, the study shows that the most important risk  source is IT (see figure 1). Two contributing factors are mentioned: On one hand, companies have failed to set-up agile IT organizations that can quickly react to market demand changes. On the other hand, too much data is insufficient or even missing or not accessible - leading to a still low level of visibility within the supply chain. Disasters, however, although often leading to high negative consequences, are not ranked as a top risk - probably due to their low probability of occurrence.

Figure 2: Approaches to risk management, source: Accenture: Don't play it safe when it comes to Supply Chain Risk Management, 2014, p. 6.

More than 75 % of the companies see operational risk management as important or even very important. This importance can be seen in the different approaches to risk management (see figure 2). The most important approaches are having a risk management in place, the use of alternative partners when needed, and the use of IT and organization to reach a visibility regarding risks. It is interesting and seems contradictory that approaches to visibility are mentioned as some risk management measure, whereas there is still a high degree of intransparency in supply chains - as mentioned above in the sections on top risks.

Accenture reports about very promising quantitative results of risk management, which can be measured by the return on investment (ROI). 21 % of the companies reached an ROI of between 51 % and 100 % from their investments in SCRM. Another 7 % of the enterprises are proud to have an ROI of even more than 100 %. However, the the question remains, how an ROI from specific actions can be measured without taking into account additional influences (from outside risk management activities).

Accenture's analysts identified three key practices that support and enhance the effectiveness of SCRM:

1. Leaders (the abovementioned group of companies with an ROI of more than 100 %) take care that SCRM gets a top priority in a company. They support this approach by installing a risk management officer, by developing SCRM skills of employees, and other practices.
2. Leading companies show a higher degree of centralization when it comes to SCRM. 43 % of the leaders have a centralized risk management, whereas only 37 % of the other companies have risk management centralized.
3. Leaders are considerably investing into SCRM, especially to increase the end-to-end visibility within the supply chain. 60 % of the leaders increase their investments in this area by more than 20 %. Only 23 % of the other companies have planned such high investments.

The study shows interesting results. It can be used to promote SCRM in an enterprise. Also, some best-practice approaches are mentioned. On the other hand, since most of the respondents are managers from large companies, it is not clear if those results would hold true also for small and medium enterprises. Also, the identification of 'leaders' by the ROI on SCRM-related investments seems to be at least questionable. This also concerns some of the best-practice approaches (especially the question of centralization/decentralization of SCRM).

The full study 'Don't play it safe when it comes to Supply Chain Risk Management', published by Accenture in 2014, can be downloaded from Accenture's website: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Global-Megatrends-Operations-Supply-Chain-Risk-Management.pdf

DHL's Swiss Knife?

Supply chains are extremely complex constructions. That has implications for SCRM: Due to the multi-tier character of supply chains with many thousands transactions (material, information, and financial flows) the detection of risk developments in operations is difficult. Because a broad variety of operational databases and applications is used, transparency regarding the abovementioned flows is almost impossible.

Figure 1: Visualization of a company's supply chain, Source: http://www.dpdhl.com/content/dam/presse/img/2014/dhl-resilience360-world-map-600.jpg

DHL now promises to solve ‘mission impossible’ by the introduction of ‘Resilience360’. Resilience360 is said to allow for a holistic view and the real-time identification of possible risks. The application also suggests alternatives or counteractions for identified risk; thus, it seems to be a decision support system. This and more information can be found on www.dhl.com/Resilience. The site promises a lot. So far, many of the information are of relatively generic character. Also, the video shown on the DHL’s website is a nicely computer-animated movie, but contains little concrete information.

DHL also provides two case studies: The first focusing on the use of Resilience360 at ZF, one of the big automotive suppliers; the other talking about how Resilience360 has been used at DuPont. Again, many generic topics are mentioned in the case study, so the level of detail is (understandably) low. However, it is irritating that some identical pictures are used in both case studies.

Risk categories used for Resilience360, Source: http://www.dpdhl.com/content/dam/presse/img/2014/dhl-resilience360-risk-wheel-600.jpg

In the end, we only get a shallow first impression of this ‘all in one solution’ by DHL. Too much information is of generic character. The functionality seems to be impressive, but not much details were revealed (for example, no real screenshots were shown). Thus, an evaluation of the capabilities of Resilience360 is not possible. Another question that has not been addressed in the reports is how the data sources are included: If a global player like DuPont or ZF intends to gain more transparency, they must collect a huge amount of data and integrate not only direct suppliers, but partners on each level of the supply chain. It would be interesting to understand, if and how those difficulties are solved by Resilience360.

Sources:

• DHL International GmbH: DHL Resilience360 – Managing Risks in Your Supply Chains, http://www.dhl.com/resilience (2014).
• DHL: Holistic View of DuPont Supply Chain Improves Resilience and Avoid Costs, http://www.dhl.com/content/dam/downloads/g0/logistics/resilience360/dupont_case_study_en.pdf (2014).
• DHL: DHL and ZF Drive Down Supply Chain Risk with Resilience360, http://www.dhl.com/content/dam/downloads/g0/logistics/resilience360/zf_case_study_Apr2014.pdf (2014).
• Greenway, T.: How Safe is Your Supply Chain? In: Deutsche Post DHL Headquarters: Delivered, Issue 1/2014, p. 23-25.
• Deutsche Post AG: DHL Resilience360 - neues Instrument für Risikomanagement in der Logistik, http://www.dpdhl.com/de/presse/pressemitteilungen/2014/dhl_resilience360_risikomanagement.html (2014).

Risk Management is a waste of time! And of resources. And of effort. And of money. And...

Very often, the benefits of risk management are underestimated. Or, managers do not see any benefits of using risk management for their company. Statements as "Risk management only creates additional cost" or "Risk management does not create any revenues" are often heard. (Personally, I read such statements quite frequently, when receiving answer sheets within our empirical research projects.) This statements are then used as arguments for not spending effort, time, and money to set-up or develop risk management. Very well done!

But: The view mentioned above is proven to be wrong! Aon plc., together with Wharton School of the University of Pennsylvania, have developed a so-called 'risk maturity index' (details can be found on Aon's website). The latest report on the risk matury index, which uses data from more than 360 publicly traded companies, shows some interesting results - especially when focusing on the benefits of risk management.

Figure 1: Risk Maturity Classification; Source: Bourdon, T. W.: Aon Risk Maturity Index - Insight Report, November 2013, p. 6.

Based on a set of 40 different criteria, companies were classified by their answers into 9 different categories (see Figure 1). Only .7 % of the companies reached the maximum of 5 points on the index, and were classified as 'advanced'. However, more than 50 % of the companies show unsufficient capabilities for risk management - and are classified as 'basic' or 'initial/lacking'.

Figure 2: Stock Price Volatility by Risk Maturity Rating; Source: Bourdon, T. W.: Aon Risk Maturity Index - Insight Report, November 2013, p. 63.

Figure 2 shows, that in general there is a negative correlation between risk management maturity and the stock price volatility. Thus, companies with a state-of-the-art risk management fear far less volatility of their stock price than companies with a 'basic' or 'initial' risk management.

Figure 3: Implications of the Greek Fiscal Crisis 2010; Source: Bourdon, T. W.: Aon Risk Maturity Index - Insight Report, November 2013, p. 5.

It seems obvious that economic problems in a country or a region have implication on the profitability of companies. Thus, enterprises are affected by economic crisis. However, the report shows, that companies with a sophisticated risk management system in place are less affected by such a crisis than companies with a low risk maturity index. Figure 3 shows results focusing on the implication of the Greek fiscal crisis in 2010 for the stock price of enterprises. Again: The study shows, that a well-implemented risk management contributes strongly to the economic situation of a company.

Figure 4: Implications of the Japanese Earthquake 2011; Source: Bourdon, T. W.: Aon Risk Maturity Index - Insight Report, November 2013, p. 5.

Those statements also hold for the implications of catastrophes for companies. Figure 4 demonstrates how enterprises with a well-established risk management are far better off after the Japanese earthquake in 2011 than companies with a less developed risk management. In this case, we can also see how risk management can contribute to more or less stable and resilient supply chains.

The report 'Aon Risk Maturity Index - Insight Report, November 2013', written by T. W. Bourdon et al., can be downloaded from Aon's website: http://www.aon.com/risk-services/thought-leadership/report-rmi-insight-nov-2015.jsp.

Water, Water!!!

Almost every transformation process that is required for production also needs more or less water - from the growth of raw materials, to the production of materials and components, to the distribution of products to the customers. Without water, many of those processes would not be possible. Thus, scarcity of water can be a risk for supply chains.

The PRI Association (http://www.unpri.org/), in collaboration with World Wildlife Fund (WWF), PwC Germany and the PRI investor steering committee on water risks, has published recent findings on water risks in agricultural supply chains.

Figure 1: Distribution of the world’s water (source: PRI: PRI-coordinated engagement on water risks in agricultural supply chains - Investor guidance document, p. 7.)

The researchers state, that only less than 1 % of the world's water reserves are both suitable and accessible to humans. At the same time, the demand for water has dramatically increased. In 2050, 40 % of the global population will be living in areas, where severe water scarcity occurs, so the estimates of the experts.

However, the reports focuses on water-related risks in supply chains. To identify the risks for certain companies in supply chains, the researchers followed a certain methodology. First, they identifed on a global level crops and river basins facing the most significant water risks, which were then further aggregated. This led to a list of 25 key crop/country combinations with high water risks. Then, appropriate companies were identified for the concrete assessment of water risks. A so-called 'ESCHER approach' (an extended input/output model) was applied to estimate the water consumption in water stressed regions. Although the report mentions that there were some limitations of the model and the data, it also highlights that the value of this approach is to actually provide a first quantitative estimate of water consumption and water risks in certain supply chains. Figure 2 shows two examples of supply chains in different sectors and the water-related risks.

Figure 2: Water consumption of example sectors across supply chain tiers (source: PRI: PRI-coordinated engagement on water risks in agricultural supply chains - Investor guidance document, p. 9.)

Beside those quantitative results, there are further conclusions from the output of the calculations:

• There is, unsurprisingly, a strong association between water usage and revenue.
• There is some significant exposure to certain crop/country combinations, e.g. for Indian wheat.
• The biggest water consumers are companies in the agricultural sector, in food retail, in packaged foods and meats as well as soft drinks companies. 
• A relatively low consumption in water scare regions had been calcluated for apparel, luxury goods, brewers as well as distillers and vintners.

The researchers list a variety of questions, that can be addressed to bridge research to application, and even more important to support a water risk management. The focus on:

• Awareness and relevance, for example asking where in the value chain the company is placed or if it is facing end-customers. Another question is how the company would rate the current and future importance of water risk for the continuity and pricing of its key commodity supplies.
• Water risk assessment, e.g. asking at what level and at what geographic scale the company undertakes water risk assessments.
• Impact, for example asking what percentage of key commodity spend is exposed to substantive water risk.
• Response, e.g. asking what proportion of key suppliers the company requires to report on their water use, risks and management?
• Disclosure, for example asking if the company discloses its water risk and management response?

Finally, the report proposes to apply a water risk management framework, developed by WWF. This framework consists of 5 steps:

1. Water awareness,
2. Knowledge of impact,
3. Internal action (engagement with employees, buyers, and suppliers),
4. Collective action (engagement with other organizations), and
5. Influence government.

The full report "PRI-coordinated engagement on water risks in agricultural supply chains - Investor guidance document" can be found on the PRI's website: http://www.unpri.org/publications/#WATER-RISKS.

Thanks to Christian Kalley for pointing me to the report.

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You might also be interested in a report by WWF about water-related risks in Germany. A summary of the report can be found on RiskNet's website (http://www.risknet.de/topics/risknews/das-unterschaetzte-risiko/f12c9f4bfbd07ffec7c5000f86fbc614/, in German). The report can be downloaded on the website of WWF Germany: http://www.wwf.de/fileadmin/fm-wwf/Publikationen-PDF/WWF_Studie_Wasserrisiko_Deutschland.pdf.