BLACK SWANS And Supply Chains
What happens if your key supplier goes out of business? What happens if your logistics channel suddenly breaks? What happens if you can’t ship to your top customer? What happens if the recovery stalls? Within the last several weeks, we have all seen the news about the impact of serious events impacting enterprises’ supply chains:
- Tsunami in Japan and subsequent events
- Civil unrest in Egypt, Syria, Libya, etc.
- Significant escalation of the price of oil
- Sony’s PlayStation network outage
- Oil disaster in the Caribbean (one-year anniversary)
While many have documented the importance of having contingency plans and identifying risk along the end-to-end value chain (from suppliers’ suppliers to customers’ customers), I cannot help thinking about who within an enterprise is ultimately responsible for managing risk? Is there a different answer depending on the nature of the risk? Are there thresholds below which identified risks should be managed by decentralized functional or business unit management?
The organization’s CFO or Treasurer is traditionally responsible for managing “financial” risks but many of the recent Black Swan events are operational in nature, significantly impacting not only supply chains but financial results as well. If the CFO/Treasurer is responsible, does that individual have the competencies necessary to assess and mitigate operating risks? Does the CFO/Treasurer have visibility to the information needed to make the right calls and create adequate contingency plans? If not, what then?
Is the Chief Operating Officer (COO) or supply chain leader responsible for these kinds of risks? If so, do those individuals have the requisite competencies and or authority to manage the potential financial impact? Does the COO/Supply Chain leader have the appropriate information and tools required to plan for risks that are well outside of the normal variability of supply / demand events? Who communicates and coordinates with the Suppliers? Customers? Employees? Public? Is it and should it be the same person, a group acting in consort or several individuals acting independently? If capacity becomes constrained, who decides which customers get the “limited supply of product”?
At a higher level, are there DECISION PRINCIPLES and GOVERNANCE STRUCTURES in place to help an organization clarify roles and responsibilities? If not, the speed with which an organization can react to Black Swan events may be significantly longer than necessary. A set of pre-determined decisions or rules with set tolerances/thresholds would eliminate confusion and accelerate decision-making during undoubtedly difficult situations.
Should there be a “committee” of the supply chain organization and the CFO/Treasurer groups to identify potential operational risks, assess the likelihood of occurrence, estimate potential impacts to each stakeholder group, set guidelines or rules, establish ultimate accountability, and periodically review contingency plans for adequacy? Or, should “risk” be parceled out with various functional leaders
As the events referred to above continue to unfold and are resolved, there will certainly be a case study of how well each enterprise handled the events and the speed with which they were able to react.