Supply chain function has always focused on efficiency and cost reduction by introducing global procurement, lean management, supplier rationalization, JIT inventory, distribution channel optimization and inventory rationalization. In the race of achieving higher efficiency and most optimal cost, sometimes risk management in supply chains takes the back seat.
Today, China is the manufacturing hub of the world. Exports from China are worth more than $2.5 trillion. A lot of companies across sectors have significant or almost total dependence on China due to cost advantages, be it IKEA or Apple or a small toy marketer. In some of the segments like electronics components, Chinese companies command global supplies.
nCoV (Noval Coronavirus) is the buzz word of global news since the last few days. Its spread in China is not only going to impact the country’s economy but will also impact supply chains of companies across the world. Many large companies are putting all efforts to avoid any major setback due to disruption caused by the coronavirus outbreak and they are working on risk mitigation plans by exploring alternate source of supplies from other geographies. Developing alternate source in a small span of time is also an uphill task for them apart from cost implications. Impact of this disruption is still limited on many importers across the globe as most of them were prepared for holidays on account of Chinese New Year. But prolonged disruption will have a serious impact on companies.
It’s clearly due to poor risk prediction and management by supply chain. Over a period of time, organizations have started understanding the value of supply chain risk management. Still, the concept does not seem widespread across industries. Although many large corporate and multinational organizations have included it as part of their processes, still these companies are facing challenges post coronavirus attack.
In my opinion, there are a few reasons for such a situation:
- Economic Factors: Poor balance between risk factors and commercial factors. This means, due to commercial factors, some of the risk factors are overlooked.
- Process Factors: Poor assessment of global risk or weak process of risk mapping
- Resource Factors: Resource constraints for supply chain risk management (i.e.: human capital, information technology, infrastructure, capital)
Out of above-mentioned factors, the first one is more relevant in most of the cases.
One of the key learning from recent disruption is about the importance of risk management in the global supply chain. Supply Chain Risk Management not only helps in the elimination of potential and unexpected costs, reduced disruptions and time to recovery, but also support in supply chain performance improvement.
There may be a trade-off between supply chain risk and the cost of hedging risk. But the risks can’t be ignored.
This article has been authored by Vikash Khatri, Founder of Aviral Consulting Pvt Ltd.
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