October 17, 2014

Supply Chain Risk Management Budget: Debunking the Myth

Bindiya Vakil


Many supply chain professionals today believe that companies just don’t have the budget for supply chain risk management.  I want to put this argument to rest.  Almost all companies spend time, money, effort and resources on managing and mitigating supply chain risks. This includes finding alternate sources for their parts.  Companies spend millions on inventory optimization and other software to put in place optimum buffer levels to protect their business.  People focus a portion of their time developing supplier relationships and executing risk mitigation strategies to protect their business.  All of this effort and dollars constitute the supply chain risk management budget.  It is rare to find a company out there which ignores all of these activities completely.

Common Misconceptions

The misconception about the budget for SCRM arises from the fact that the budget for these activities typically sits within the normal operating budget.  It is usually not explicitly segregated.  So the good news is that supply chain risk management is an integral part of every company’s every day operations.  The opportunity (not bad news) is that for the most part, risk management activities are mostly ad hoc and are done without a unifying framework or explicitly stated strategy. 

Supply chain resources are mostly focused on the here and now problems – my shortage today, that excess I need to disposition to meet my inventory turns target, this quality issue, that ECO and so on.  They have very little time to step back and look at risk strategically.  This is why they focus on inventory as the most common strategy for risk management.  They don’t have the information or analytics readily available to pursue other more effective strategies targeted at the specific exposure.

This lack of time and perceived lack of budget is the opportunity.  If resources have very limited time, then supply chain executives need to make sure that their organizations optimize this time to mitigate the right set of risks.  The need is to have information and analytics at their fingertips so they can direct their efforts to the right set of risks.  The limited time and resources should be used towards executing a mitigation strategy that really addresses the right critical part and the right exposure for that part.  Incidentally, critical part/supplier here is not defined in terms of spend but in terms of impact to business of losing its supply!  And inventory and second sourcing are not always the right solutions.  In fact, inventory can create exposures to other risks like obsolescence, and second sourcing can be expensive and time consuming (more on that to come).

AMR’s 2008 Global Enterprise Application Market Sizing Report supports this assertion that the need for better more deliberate SCRM will cause companies to adopt optimization and simulation tools.  Below are additional findings from AMR’s 2007 survey of 89 manufacturing & retail companies on Managing Risk in the Supply Chain (Hillman & Keltz):

“SCRM is an increasingly important initiative for supply chain and operations professionals. 46% of firms plan to implement or evaluate SCRM technology in the next 12 to 24 months.  One-third of firms say they have dedicated budget line items for SCRM activities.  54% of firms plan to increase their budgets for SCRM over the next 12 months. Of those firms, the average spending increase will be 17% year over year.”

Bindiya Vakil is the CEO and founder of Resilinc. She will be part of a panel on "Risk Mitigation: Contingency planning and the art of always being prepared" at the upcoming 8th Annual Hi-Tech & Electronics Supply Chain Summit this October 28th, 2014. To hear Bindiya speak, register here.

Topics: supply chain risk management, supply chain resiliency management