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Mark Fontaine-Westhart, CMRP & Greg Hutchins, P.E.

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Supply Chain

Supply-Chain Risk Must Rely on ERM for Rescue

It’s time to merge enterprise risk management principles with key supply-chain activities

Published: Thursday, April 7, 2011 - 05:30

The recent earthquake in Japan and evolving nuclear plant disaster have forced firms to triage their supply chains, adopting an emergency-room approach to responding to the crisis. Recent articles in the The Wall Street Journal and The New York Times have discussed potential disruptions to supply chains of companies doing business with Japanese suppliers and manufacturers. This underscores the critical importance of supply-chain management—and linking it to enterprise risk management (ERM). Unfortunately, many companies do not systematically incorporate ERM principles, practices, and tools in their supply-chain management activities.

Chief executives and senior managers have long known the benefits of ERM principles and practices. ERM is axiomatic in understanding the business and market environment, and in determining how to identify opportunities and manage risk throughout the product development life cycle. Successful entrepreneurs and start-ups are adept at not only discovering opportunities for new products and services, but also are among the best at systematically identifying and managing risk throughout the product life cycle and the supply chain.

Savvy supply-chain managers intuitively recognize how disruptive and costly risk can be in their supply chains. Global supply chains have become increasingly complex. Risk associated with natural disasters and their impact on global markets has been examined in some detail, both in academia and within large corporations. Unfortunately, the systematic application of ERM principles and tools to managing supply chains has been limited.

Many supply-chain managers instinctively examine risk based on the phases in the supply chain: planning, sourcing, making and buying, distributing, and disposal. Other managers view risk by looking at systems and technology, processes, stakeholders, and quality dimensions and examine these relative to system complexity, maturity, and capability of the components therein. Global location number (GLN) implementation provides an example of enterprise-level system risk that affects all suppliers. GLN implementation has enterprise- and operational-level impacts on all suppliers. However, those impacts will vary depending on suppliers’ relative abilities to manage deployment processes, engage critical stakeholders, and address quality issues. Suppliers with enhanced learning and training capabilities, and adaptive systems and people, will fare better.

An emerging supply chain model that is gaining momentum combines ERM principles (e.g., environmental evaluation, and risk identification, assessment, and response) with key supply-chain activities. Referred to generically as “smart supply-chain management,” this approach provides a common language for executives and senior supply-chain managers. Executives routinely incorporate the language of risk in their day-to-day leadership activities. Supply chain managers intuitively understand risk across key supply-chain activities. Unfortunately, ERM practices have been “missing in action” in many supply-chain management models.

Smart supply-chain management bridges this gap by addressing the following:
• Directly linking enterprise-level risk concepts with strategic and operational supply-chain management activities
• Systematically establishing an assessment, evaluation, and response architecture that integrates traditional ERM and supply-chain management processes, activities, and tools
• Developing risk mitigation and management strategies and plans to address supply chain risks and aligning them with enterprise-level risk management strategies.
• Facilitating strategic partnerships to jointly manage and share risk, including those within the supply chain as well as enterprise-level risk
• Providing the impetus for creating risk management networks that engage suppliers, service delivery networks, and group purchasing organizations in collaborative strategy and risk-management planning activities.

 

The beauty of smart supply-chain management is its scalability and the mutually beneficial outcomes for all parties involved. It enables new and developing buyer and supplier relationships to collaboratively examine key risk drivers (e.g., product maturity and complexity, technology, and delivery processes) and move to mature, long-term partnerships. These relationships can then evolve and adapt to the changing marketplace. This approach helps to reduce risk and improve performance across the entire supply chain Smart supply-chain management continues the trend toward greater adoption of ERM to other parts of business operations.

The time has come for the marriage of supply-chain and enterprise risk management. Supply chain managers and C-suite executives appreciate the respective value of each. It’s now time for both to integrate supply chain and enterprise risk management into strategic and operational planning activities.

Discuss

About The Author

Mark Fontaine-Westhart, CMRP & Greg Hutchins, P.E.’s default image

Mark Fontaine-Westhart, CMRP & Greg Hutchins, P.E.

Mark Fontaine-Westhart is chief logistics officer for the Upstate New York Healthcare System at the Department of Veterans Affairs. He has 25 years of diverse management experience and specializes in managing quality, acquisitions and supply chains, risk, and projects. As a coach and mentor, Fontaine-Westhart develops and deploys training and professional programs, workshops, and training materials for lean Six Sigma for supply-chain management, organizational change initiatives, and continuous improvement. He may be contacted at Mark.Fontaine-Westhart@va.gov

Greg Hutchins is the principle engineer at Quality + Engineering, a Portland, Oregon-based quality auditing, risk management, forensic, and technology assessment firm. Hutchins has conducted performance audits, risk assessments, and compliance audits for more than 25 years. He is the author of Value Added Auditing (Quality + Engineering, 2003), and Standard Manual of Quality Auditing (Prentice Hall, 1992), among others. He may be contacted at GregHutchins@QualityPlus Engineering.com.