128 • Supply Chain Risk Management: An Emerging Discipline
covering 0–45days into the future, and the tactical horizon, which nor-
mally covers 1–18months into the future.
Referring back to the discussion in Chapter2 regarding the four pillars
of supply chain risk, the supply management profession is by far the most
mature discipline within the supply chain arena when it comes to iden-
tifying, assessing, mitigating, and managing risk. Procurement profes-
sionals have been leveraging techniques to mitigate and manage risk for
more than 50years. Let’s briey identify operational and tactical risks that
reside within this risk pillar every day. In no particular order, we have sup-
plier lead times, supplier quality, supplier prices, supplier insolvency and
bankruptcy, supplier delivery issues, fraud, corruption, counterfeit parts
and components with subtier suppliers, and inbound logistics. To further
focus our discussion, we’ll classify these risks into supplier, logistics, and
fraud, corruption, and counterfeiting. Table7.1 can be used as a reference
throughout the supply risk discussion.
Supplier Risks. As mentioned, procurement professionals have been
trained for many years to think about risk and contingencies, probably
much more so than any other discipline within the supply chain commu-
nity. One of the main reasons is most manufacturers’ cost of raw material
represents approximately 50%–70% of their total cost of goods sold. at’s
a huge portion of the total cost of nished products and an abnormally
large risk element to the organization.
As shown in Table 7.1, the traditional approach to handling sup-
plier risk has been to use buer inventory or statistically derived safety
stock to absorb volume shocks or delays or supplier delivery and quality
issues. One of the traditional techniques many procurement professionals
have been trained to execute to ensure better pricing and better delivery
has been placing more and more of their raw material requirements with
one supplier. is traditional thinking and training was driven by the
premise that when a company’s purchase requirements become a larger
portion of a supplier’s order board, that supplier will bend in terms of
price and do its best to demonstrate solid delivery performance because
of the risk of losing those orders and volume.
is procurement strategy worked well in a stable environment before
globalization and supply market volatility. What actually took place is
many companies got a bit complacent performing their due diligence.