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Risk management breeds better performance

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Posted on 14/08/2013 by Wayne Brophy FCILT

Companies with mature supply chain risk management strategies demonstrate better operational and financial performance, a new report has found.

Analysis from the Massachusetts Institute of Technology (MIT) Forum for Supply Chain Innovation and PwC, based on previous research, identified five key principles that the authors say should be used to improve risk management in global supply chains.

Supply chain disruptions can have a serious impact on the operational performance of businesses, according to the report. The potential costs and even lost business generated by such problems is likely to result in compromised financial performance.

However, companies that can call on mature supply chain risk management strategies are more resilient in the face of these disruptions, since they can mitigate the impact and make sure they recover faster. Overall, this means businesses which have contingencies in place to deal with risk are those which tend to perform best on a number of performance indicators.

Businesses need to pay close attention to improving the flexibility of their supply chains, says MIT, since this will allow them to work more effectively around unforeseen circumstances. Similarly, investing in risk segmentation is vital, since this will limit the ripple effect of any given risk throughout the business as a whole.

The principles set out by MIT and PwC were based on the findings of their 2010 Global Supply Chain and Risk Management Survey, which found that as many as three out of five companies had “immature” risk processes. This means they pay relatively little attention to reducing the threats to their business and usually do so through the positioning of extra inventory or raising their capacity.

And this was despite the fact that most participants accepted that supply chains are becoming more complex, which means potential risks are growing. A total of 95 per cent agreed that organisations within the supply chain are becoming more dependent on each other, and 84 per cent said the configuration of entities within their supply chains is changing more frequently.

“As companies expand into the global marketplace, they need to adjust their supply chain strategies to meet the increasingly complex requirements of their customers and manage multiple distribution channels,” says Glen Goldbach, supply chain director at PwC.

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