Operational Risk
Imagine a company that sells some of the hottest products on the planet
with just a few products representing a disproportionate share of revenues.
Imagine further that this company has relied on a single Chinese sup-
plier and location to build these products. And imagine even further that
this Chinese supplier is secretive, oen showing an unwillingness to share
information publicly, particularly about labor problems. If this scenario
sounds operationally risky (and strategically risky as well), you just g-
ured out why Apple has made a decision to diversify its supplier base by
expanding its outsourcing to a second supplier located in Taiwan.
is chapter will discuss the many potential operational failures through
the prism of the four pillars of supply chain risk—supply risk, demand risk,
process risk, and environmental risk. We will prole operational risks that
happen every day in these four areas. We’ll also discuss these risks in the
context of two basic operation horizons and present a program that tradi-
tionally has been utilized to mitigate and manage operational risks.
By far, a disproportionate set of supply chain risks will be categorized
as operational since this category includes internal and external quality
problems, late deliveries anywhere in the supply chain, service failures due
to poorly managed inventory, problems related to poor forecasting, and a
thousand other events related to operational performance failures. is
section discusses the operational risks that are part of supply risk, demand
risk, process risk, and environmental risk. e two prevalent horizons
aecting supply chain risk management are the operational horizon,
128 • Supply Chain Risk Management: An Emerging Discipline
covering 045days into the future, and the tactical horizon, which nor-
mally covers 118months into the future.
Supply Risk
Referring back to the discussion in Chapter2 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 50years. Lets briey 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, well classify these risks into supplier, logistics, and
fraud, corruption, and counterfeiting. Table7.1 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. ats
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 buer 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.

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