New metrics to measure supply chain risk

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It says a lot about the perception of supply chain that it is now a subject of debate at the World Economic Forum.

And, the fact that it chose to focus on risk is hardly a surprise given the ways that natural disasters that have affected supply chains over the past couple of years.

The report, New Models for Addressing Supply Chain and Transport Risks, produced in collaboration with Accenture, calls for the development of a recognised set of supply chain risk quantification metrics to enable businesses and governments to obtain an accurate understanding of risk to networks, better prioritised risk management activities and alignment of incentives, exposure and risk appetite.

It points out that while supply chain risk management metrics are still largely unrefined, the financial impact of risk can be indirectly estimated.

One indication is the pronounced effect on stock markets in the days following an external disruption to supply chains, it says, pointing to the fact that during the Egyptian uprising, the EGX 30 Index fell 16 per cent in two days, while the Japanese earthquake and tsunami resulted in the Nikkei Index dropping 10.6 per cent.

The report goes on to suggests that in the commercial sector, the revenue or gross profit at risk as a result of supplier failure is a useful measure to help senior management understand their risk exposure.

Clearly, there is room for discussion over what should be measured. The imperatives driving the food supply chain are significantly different to heavy engineering. A natural disaster, for example, will present risks to both, but the impact on each could be very different – and the metrics need to reflect that.

The report also calls on business to assess supply chain risks more explicitly as part of procurement, management and governance processes, as well as improving risk visibility through better information sharing and collaboration.

Few would argue with such recommendations. But it also opens up the question – if such risk metrics had been in place five years ago would it have changed the decisions companies have made about the structure of their supply chains?

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