Last week in "Are You A Gambler", I discussed supply chain risk. When you gamble, do you know the amount of your bet and the relative probability of winning or losing? Since most companies have no formal risk assessment methodology or processes to mitigate risk in their supply chains, they do not know the amount of their wager or their risk of losing. Usually the costs of failure become known after the failure occurs and they are far greater than anyone has imagined. How do you develop a process to identify risk in your supply chain?

The process generally begins with a supply chain map. What is a supply chain map? A supply chain map is a graphical representation of the flow of goods from your supplier until they reach your customer. A complete map should identify every process (physical, financial, informational, relational and innovational) in your supply network. Highly detailed maps can extend to forth or fifth tier suppliers. Some organizations may have multiple supply chain maps or they may prefer to map by commodity. Regardless of preferences, all that matters is that you get started.

Why should you create a supply chain map? If done properly, some benefits of a well executed map are: quick identification of weaknesses, dependencies and overlaps, support for your strategic planning process, facilitate supply chain redesign, clarify channel dynamics, augment communications and provide a basis for supply chain analysis. Most people can grasp process flow better when it is graphically represented. Thus, a map can be quite helpful in understanding a company's supply chain, for evaluating the current supply chain, and for contemplating realignment of a supply chain.

Once the map is completed, then the fun begins: identification of the possible failures in your supply chain. Supply disruptions generally fall into two main categories - Supplier failure (performance, strike, bankruptcy etc.) and environmental (weather, earthquake, terrorists, SARS etc.). Environmental disruptions are generally sudden in nature and are difficult to predict. The effects of environmental interruptions can best be mitigated through geographical supply chain diversity and disaster recovery planning.

On the other hand, supplier failure disruptions can be predicted and planned for. A key component if your supplier management and development plan should be to create a supplier risk scorecard. This scorecard should quantify the likelihood of whether a supplier will fail to perform and identify the financial impact to your organization of the failure. Quantitative failure metrics to measure your suppliers should include relationship, performance, human resources, supply chain viability, financial health and environmental indicators.

Each of your suppliers can be charted on a grid as to their probability of failure and the related financial impact. Now you have completed step one of controlling risk in your supply chain - you have identified the potential points of failure, you know the size of the bet and the relative probability of failure. Next - Risk mitigation strategies.
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Steve Belli

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