Managing supply-chain risk requires the ability to effectively and continuously apply three pillars of risk mitigation. Similar to the three legs of a stool, these are of equal importance, and when combined create the foundation for a comprehensive risk-management strategy.

1. Look Beyond the Obvious
Some organizations focus on mitigating risks that are palpable and overlook less-obvious ones. For example, are you aware of the risks that exist throughout the chain of custody for critical purchase components?

Many distributors source products and equipment components from offshore sources whose quality standards are often less robust than in North America. I worked with an organization where the keys on the keyboard of an important piece of equipment were sticking. After an exhaustive analysis, the fault was found to be a process change by a subtier supplier (i.e., a supplier to a subcontractor), which had reduced the amount of dielectric grease applied between keys.

What mechanism do you have in place to confirm the origin of critical equipment or components? How are you able to ensure consistent quality of these goods?

2. Expect the Unexpected
Organizational risk-management plans may deal with known or suspected risks but fail to provide a comprehensive overview of the risks inherent within the supply chain.

Following last year’s disaster in Fukushima, Japan, several automotive manufacturers, including Chrysler, Ford, Mazda, and Toyota, were forced to limit production of vehicles with specific paint colors because the availability of Xirallic, a type of pigment sold by Merck, was down sharply. All Xirallic is made at a single plant in Onahama, a neighbor of Fukushima.

After Merck marketed the pigment as having improved luster compared with existing products, the automakers began buying it while ignoring the potential for supply disruption and how they might continue operations in the event of a problem at the plant. Having no qualified secondary source for an important supply is common, but when things don’t go as planned, the effects — curtailed production, depressed revenue — can be devastating.

Have you identified and qualified secondary sources for the supply of critical components, equipment, and services?

3. Practice to Be Perfect
Some risk-management plans are contained neatly in binders and placed on shelves. That doesn’t mean those responsible for implementing these strategies are aware of the origin, likelihood, and severity of risk that exists. Effectively planning for risk requires full disclosure of risks, and all risk-mitigating and contingent actions that may be required, to all who will have to perform such actions.

The most successful risk-management plans are those that involve input from and education for key stakeholders. Many organizations invest significantly in training programs to improve employee skills, but not in educating employees on inherent business risks and their role in managing and mitigating such risks.

Shawn Casemore is president of Casemore & Co., a consulting firm specializing in supply-chain management.

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