Accenture Academy Blog

The problem with risk management is that it is so unpredictable. What we can do, however, is to divide risk into two major categories. The first is risk for which we have no control or effective solutions to eliminate or mitigate, such as the end of the world next Tuesday or will Venezuela nationalize my operations. The second is one where we can take concerted actions to either eliminate or mitigate the impact of risk, such as an oil well rig in the Gulf of Mexico will explode and pollute the environment.

We in supply and procurement management are risk managers. Consciously or unconsciously, we make risk management decisions every day. Over 60 percent of the commercial semiconductors used around the world are made in Taiwan. Depending on your point of view, Taiwan is an independent nation protected by bilateral agreements and secure in its political and economic standing, or Taiwan is a province of mainland China that will slowly but surely be embraced socially, politically, and economically with China. Is there a risk in being dependent on Taiwan for the majority of semiconductors? Yes—if the source of supply from Taiwan was restricted for 30 to 60 days, worldwide capacity would disappear and major disruptions would occur for all those manufacturers dependent on semiconductors from any source. Yes, there is a risk, but what's the tradeoff? Should I ensure that I have an alternative and expandable source of supply that is independent of the political situation between Taiwan and China? Should I increase my inventory of semiconductors as an insurance policy against disruption? This case is a prime example of the type of risk where concerted actions could eliminate or mitigate the risk. But waiting until the risk event occurs significantly reduces the range of options that are available and the cost of switching.

How many of your global sources of supply have inherent risk factors? More importantly, what can you do about it? Many of us have embraced the concept of just-in-time (JIT) management. JIT is predicated on a stable and sustainable business environment. The longer the supply lines are, the riskier the political, social, and economic conditions of the host country are. The differences between business, social, and political conventions all increase the risk potential. JIT with the supplier located within 100 kilometers of my manufacturing plant is a far different situation from a supplier located thousands of kilometers away.

What's the lesson for us, who are so committed to global commerce and JIT techniques? It is to identify, quantify, and prepare for risk. The hard lessons we've learned over the last 10 to 15 years in global commerce have been the inadequacy of identifying and quantifying the total cost of ownership in a global trading environment. No, I am not advocating going back to a protective environment with trade barriers and constraints to free trade. I am, however, strongly advocating that you have a risk contingency plan based on the reality of your global commerce.

That starts with the identification of all potential risks, the estimated probability of occurrence, and the quantification of cost if it did occur. And finally, what can you do now to mitigate or eliminate that negative penalty of a risk? In a previous blog posting, I shared a sanity comparison checklist on evaluating the risk associated with sourcing in low-cost countries. Below, I have added a sanity comparison checklist to evaluate the risk potential with top suppliers and top global commodities. Again, the purpose is to highlight potential areas where risk is strong. Any individual score of 7 or above indicates a potential risk, and the recommendation is to develop a risk elimination or mitigation plan—otherwise, your world may actually end next Tuesday at noon!

Risk Likelihood of

Economic & Socio/Political Factors

Each of Top Ten Global Suppliers

Scale 1 = low, 9 = high

Your             My

Scoring?     Scoring

Acme Manu.

Each of Top Ten Globally Sourced Commodities

Scale 1 = low, 9 = high

Your             My

Scoring?     Scoring

Semiconductors[FR1] 

Percentage this supplier represents of the total marketplace 0 = <10%;1 = >10%, 2 =>20%, or 9 = >90% or more, etc.

6

N/A

Percentage this supplier represents of your total spend 0 = <1%;1 = >1%, 2 =>2%, or 9 = >9% or more, etc.

8

N/A

Percentage this commodity represents of your total spend for these commodities 1= <10%; 2 =<20%, or 9 = >90% or more, etc.

N/A

8

Capacity constraints of this supplier. Supplier is operating at this level of available capacity 0 = <10%;1 = >10%, 2 =>20%, or 9 = >90% or more, etc.

9

N/A

Risk of gov’t intervention, regulation, competition, or nationalization

4

2

Political, social, cultural disruptions

5

N/A

Educated & available workforce

5

5

Technological innovation

5

5

Established industrial base

5

N/A

Financial health

5

3

Intellectual proprieties risk

7

5

Management team

3

3

Developing competition

6

3

Damage to public image

5

N/A

Cost of counter-trade

6

3

Excess legal costs

5

4

Labor conflicts issues

5

3

Sustainability

6

4

Environmental issues

7

6

Supplier’s sourcing costs

5

3

Admin costs of acquisition

5

6

Transition cost to replace

8

5

Other

Other

Other

TOTALS

120

68

 

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