April 02, 2015

Overcoming Objections to Investing in Supply Chain Risk Management

Wayne Caccamo

INTRODUCTION

supply chain risk management business caseIn the Ultimate Guide to Supply Chain Resiliency Program Success, we identify six typical objections to supporting investments in supply chain risk management programs and share specific remedies. Areas of resistance tend to be related to professional incentives, psychology, misperceptions about costs, and a lack of awareness and education. Understanding the role that each of these factors may play and being prepared to neutralize the resulting objections is key to making your supply chain risk management business case. In this post, 5 objection categories are shared; our next post will address the sixth and final objection category.


1.  Incentives and human nature

At the core of the incentive issue is that few executives are compensated or incentivized in their day-to-day job to rigorously manage risks. What has been described as risk apathy is driven by supply chain executives who often find themselves at the center of the daily storm, striving to balance very demanding operational objectives while satisfying customers, cutting costs, and helping grow revenue. They must deliver results today while working on capabilities that will make companies competitive in the future. From a psychology perspective, it is easier to focus on the burning short-term issues that are here and now than worry about the next black swan event. As a result, it is easier to put off investments in risk management.

2. Dependence on supplier collaboration

A typical objection to investing in a supply chain resilience program is the dependence on supplier transparency and collaboration. Many organizations see resilience programs (especially those whose value proposition depends on n-tier supplier visibility) as a non-starter since historically suppliers have been reticent to share information that they fear may be used against them, for example, in financial negotiations. A lack of data standards and varying supplier IT maturity levels can further hinder an effective data exchange.

3. Perceived cost of visibility

Another common point of resistance is cost, especially the perceived cost to achieve end-to-end supply chain visibility. It can seem daunting to ponder the cost of supporting an internal team to reach out to potentially thousands of suppliers and collect and maintain data at the necessary level of granularity, integrity, and accuracy over an unbounded period of time.

4. Conflicting objectives

Many supply chain resiliency tools and remedies seem at odds with popular supply chain cost efficiency strategies such as lean inventory management and other measures to reduce cost while remaining innovative. As a result, various stakeholders may hesitate to get behind a program they view as increasing costs by supporting measures such as building buffer inventory and engaging alternate/ redundant suppliers. Moreover, the relentless focus on cost reduction as a pervasive business objective and metric causes the need to focus on risk-reducing objectives – such as quality, on-time delivery, responsiveness, diversity, and supplier viability – to be overlooked.

5. Difficulty in valuing risk management

A companies’ inability to calculate and collectively agree on how to value risk due to a supply chain disruption can obstruct making progress in risk management efforts.


RECOMMENDATIONS

Here are some suggested supply chain risk management program critical success factors and supply chain risk management best practices for overcoming these objections:

  • Educate leadership on how supply chain risk management programs align with strategic objectives and how a failure to act can derail the achievement of strategic goals.

  • Provide empirical evidence of the probability of a significant supply chain disruption event and the short and long-term business and financial consequences.

  • Speak the language of business value and prepare an ROI analysis.

  • Provide a dispassionate analysis of alternative solutions or taking a “do nothing” approach to the supply chain resilience and risk management challenges and the consequences of not pursuing resiliency investments.

  • Develop and communicate strategies and plans to mitigate the risk of suppliers not collaborating in the development of your multi-enterprise resiliency program. (Stay tuned for an upcoming Blog post which expands on this topic or download the Ultimate Guide now).  

  • Address “conflicting objectives” head on by educating stakeholders on the need to balance what Cisco characterizes as the “resiliency challenge” – balancing speed and flexibility, and how to be innovative while being resilient.

  • Converge on a risk value standard that is based on revenue impact and avoid arguments about the probability of disastrous events occurring or how to value things like brand impact. Provide best- and worst-case revenue impact scenario and mitigation cost estimates that can be compared against established risk tolerances so that decisions can be made using a consistent process.

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Topics: supply chain risk management, SCRM Best Practices