Ignore everyday risks at your peril

A 2013 study conducted by Deloitte found that 64 percent of the global executives surveyed reported they had a risk management program in place that is specific to the supply chain. That being said, 45 percent of the respondents said their programs were somewhat effective or not effective at all. Respondents — especially those in the technology, industrial products, and diversified manufacturing sectors — reported that supply chain disruptions have become more costly over the past three years. They also cited margin erosion and sudden demand change as two of the most costly problems.  Moreover, the 2013 Global Supply Chain and Risk Management Survey conducted by the MIT Forum for Supply Innovation and PricewaterhouseCoopers found that in the last 12 months more than 60 percent of companies surveyed reported that their performance indicators had dropped by more than three percent due to supply chain disruptions.  While there are many factors which are likely to contribute to the issues pointed to in these studies, I believe that one is that companies focus largely developing risk management strategies to mitigate and cope cataclysmic events and not the day-to-day bumps in the road.  As such, companies tend to be ill-prepared to handle the day-to-day bumps.

Big events are outlier events

Because big events such as hurricanes, tornados, tsunamis, and terrorist attacks can have a long-lasting impact and often visual impact on the logistics and supply chain industries they tend to stay top of mind. That being said, these events are outlier events.  “Outlier events have much more influence than they should,” Professor Ananth Raman of Harvard Business School told David Stauffer for an article for the school’s website. M. Eric Johnson, director of the Center for Digital Strategies at Dartmouth College’s Tuck School of Business, told Stauffer for the same article, “Managers will often consider the giant risk but ignore the smaller risks that create friction in the supply chain.” When companies ignore the smaller risks, they do so at their peril.

You can’t ignore the day-to-day

Creating risk management strategies that focus on the everyday events is critical. Dealing with these events in a reactive and piecemeal fashion is inefficient and ineffective and can significantly hurt your company.  The following are some tips on what to consider when developing an effective risk management strategy which focuses on the everyday risks:

1. Employ a strategy that is robust and closely monitored.
2. Put a leader in charge.
3. Clearly define your process and make it comprehensive. Establish a well-defined process to mitigate events such as cashflow contingencies, client credit risk and default, competitor interruptions, inventory risk, data backup and recovery, key client attrition, employee satisfaction and retention, social media use and abuse, and reputation recovery.
4. Make sure the strategy is both nimble and flexible.  Being intractable can exacerbate issues.
5. Don’t forget about human resources. Don’t be afraid to move employees into new roles. Moving an employee into a new role permanently (or for a specified period to deal with an event) is a powerful and effective strategy.
6. Be first. If there is a problem, be sure that the clients hear about the problem from you. When you contact clients, tell them what the issue is and what you are doing to address it. Be clear, concise, and honest.
7. Educate. Take the time to make sure everyone is educated about the strategy.  If just one person knows the strategy, it will not be effective.

A big event might happen, but everyday events will happen… every day. Don’t give your company Chicken Little syndrome by focusing only on big events.