RISK ASSESSMENT MEASUREMENT

SCLRC, Q1 2010 NEWSLETTER

The Coca-Cola Company’s John Brown discusses the metrics of supply chain risk measurement with a defined and consistent terminology these days since the publication of ISO 31000 last November. He refers to the process with the language employed in the standard, ‘risk assessment and risk treatment monitoring.’

The significance, to hear him describe it, is considerably more than semantic.

“A typical approach has been to treat business continuity as the core concern and look at supply chain risks as a factor embedded within that. In reality, business continuity planning and management is a treatment for the risk of business interruption. Companies basing their supply chain risk management around business continuity are attentive mostly (if not exclusively) to internal factors they can control within their own value chain. But as we know, external risks also impinge on the supply chain.

“We’ve flipped the order. It’s a fundamentally different way to approach supply chain risk. Now, in conjunction with looking at factors inside the value chain, you also look at factors outside the company’s four walls: social, political, public opinion, changes in government regulation, changes in business stability. Then you look at how these impact business continuity, as well as other aspects of supply chain risks: security, legal and regulatory compliance, etc.”

The consequences of this change are expected to heavily impact both the analysis and on-going measurement of supply chain risk. For starters, it presumes a dynamic approach with relationships and situations in constant flux. “In the Coca-Cola system,” for example, “we look at risk events along two dimensions: the likelihood they will occur and the consequences of what happens if they do. The challenge is to develop metrics that can assess both factors, likelihood and consequence.”

Measuring the likelihood factor in the supply chain risk equation is the more challenging and, in terms of objective measurement (rather than subjective intuition), remains at a rudimentary level. For many supply chain risks there is a lack of historical data upon which to determine a calculated likelihood. “We must rely on judgment with the implicit understanding that we become better over time at estimating likelihood.”

Tim Astley, Principal Strategic Risk Consultant at Zurich, concedes the difficulty of anticipating such things as natural disasters but suggests some basic areas that can lend themselves to monitoring: “We’re looking for preliminary measures that provide advance warning,” he notes.

To that end, Zurich has recently undertaken with the University of Manchester (Great Britain) School of Business to begin tracking a broad range of events triggering supply chain disruption. The intent is to gather sufficient data to compile actuarial probabilities of such events occurring. “The top four causes found in the first research were accidents, production breakdowns, labor problems and insufficient skills,” Astley notes.

In evaluating supply chain risk, Zurich looks at five broad areas:

• Market exposure related to geographic, economic, political and structural factors;
• Supplier exposure related to geographic, economic, political and structural factors;
• Supplier management with respect to such factors as selection, performance monitoring and financial strength (“it is surprising how frequently we encounter companies who are working with critical suppliers where contractual arrangements don’t even exist”);
• Business continuity management addressing regulatory, commercial and human resources as well as physical risks such as theft or accidents;
• Supplier issues including customer/buyer relationships, delivery, intellectual property issues and supplier supply chain management.

While acknowledging that currently a universal supply chain risk is supplier insolvency, Astley underscores that “it is important to ensure a balanced scorecard so that undue attention is not given to just one risk area.”

“Having the method and tools to map out supply chains is a huge task,” admits The Coca-Cola Company’s John Brown. But he takes hope in a multi-year project recently initiated by M.I.T. to establish just such a framework.