The first step in managing risk is identifying where a company is at risk. The tendency for most companies is to think of risk in a fairly narrow context, suggests David Closs, a professor at Michigan State University (www.msu.edu). He believes companies need to be aware of the risk factors in a broad range of business decisions.
Closs notes forecasting is particularly risky but investment often can be rewarding. Better forecasts lead to better decisions as to positioning resources while potentially reducing a company's need for inventory.
One tool to better forecasting is data warehousing that allows companies to gather information intelligence by running what-if scenarios. For example, several auto manufacturers are using data warehouses to integrate sales and manufacturing data across vehicle platforms, according to Gustavo Gaeta, partner in IBM Corp.'s (www.ibm.com/bcs) supply chain management business consulting practice. Vehicles can have as many as 25,000 different option configurations.
Manufacturers mine data warehouses to identify less popular combinations. Combining sales forecasts with these configurations, they understand what buyers want per region, enabling a reduction in both parts and finished goods inventory.
While technology tools such as data warehouses can be invaluable for some companies, managers must identify which tools add the most value to their organization and balance investment against potential gains. Yet the ability to leverage information may be the biggest risk avoidance tool companies overlook, suggests Gaeta.
"Many companies have evolved through mergers and acquisitions without merging their information systems, thus impeding their ability to manage risk," he notes. "They may not have a clear understanding of metrics, particularly in procurement or inventory management. They are missing visibility and continuity. They can't see the challenges in supply chain nor react to changes in the marketplace." As he sees it, companies without fully integrated databases lack the flexibility to react to change.
"While some companies have migrated from information-systems integrated internally to systems integrated along the supply chain, others still have difficulty using internal information," Gaeta adds. "They need appropriate metrics to sense when challenges arrive and to be able to handle them."
Choosing suppliers is a challenge that also involves risk. Closs explains companies must make decisions such as which component suppliers to target, what contract measures to include, and whether to add backup suppliers or require suppliers to provide redundancy.
In terms of a company's own operations or production, what kind of capacity and flexibility is needed? In the logistics arena, what are the required levels of capacity, availability, reliability, security and consistency?
Risk is evident in something as basic as determining the company's business strategy, notes Closs. Is a company willing to outsource manufacturing or supply chain functions? Outsourcing means losing a degree of control. To what extent is the company willing to risk its intellectual property and control of production or supply chain?
As global supply chains extend into more and more third-world and undeveloped areas, risk might be reduced through knowing as much as possible about suppliers. "However, reducing risk is not the typical motivation behind supplier research," observes Gaeta. "There is more focus on information mining to protect brand. As companies focus on understanding suppliers, they are finding an imbalance of information on sources. Populating databases with more information and identifying secondary sources of suppliers helps to mitigate risk," he adds.
While few would argue mitigating risk is critical, companies also need a plan to deal with potential risk situations. Eugene Klein, general manager-warehousing with food distributor SYSCO Corp. (www.sysco.com), suggests companies, especially those in the food industry, should have a management structure in place to prepare for and oversee special situations, as well as a contingency plan to respond quickly and effectively to unplanned events.
"An appropriate management structure should minimize the possibility of a special situation occurring," Klein notes, and the contingency plan should be activated when an emergency occurs despite all efforts to avoid it. "In this way, companies may prevent or substantially reduce risk through effective risk management programs," Klein notes.
Klein suggests a contingency management team should be cross-functional, with representatives from senior management, operations, distribution and logistics, legal, quality, engineering, sales and marketing, and public relations. "Keep the team as small as possible to facilitate action. However, include line employees during the development process to broaden the perspective and lend greater importance to the work. For continuity and control, the group should be appointed by senior management and led by a senior executive in a position of authority," Klein insists.
"Eliminating all risk is neither possible nor cost effective, so companies must identify the most vulnerable components of an operation and apply a greater share of resources to the most critical components," Klein states.
Because you cannot eliminate all risk, Closs notes, enterprise risk planning requires balancing the sources of risk. "Operations risks generally are cost related; demand side risks generally are revenue related," he explains. "In trying to balance the two, companies must maximize profit while choosing where to accept risk."