Treasury & Risk: How does a company go about quantifying its supply chain risk?
Bosman: Start by identifying critical dependencies, locations, processes and delivery systems, where an interruption could severely reduce revenue generation and profitability. Then, determine the scenarios that could create the worst possible damage. Calculate the revenue or profit at risk, should there be unplanned downtime.
Finally, assess the organization's flexibility to respond. For example, is there an up-to-date business continuity plan that has been tested? It is also important that companies consider the wider context in which their supply chain operates. Many companies have rushed into markets, such as China, India or Eastern Europe, without fully considering the potential new risks. But such risks should be examined before commitment to a region.
Treasury & Risk: How much supply chain risk should be transferred?
Bosman: Many companies view insurance as a primary component of supply chain risk management, but in my view it more properly functions as a last line of defense. Loss prevention and control are more critical first steps because risk-transfer options are not available for every type of risk and the financial impact of many supply chain risks go beyond what insurance can provide in indemnification.
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It is important that risk management be considered as part of the initial supply chain planning process, not an afterthought. Businesses should consider asking themselves: "Are we too dependent on one supplier for a product? If there's a natural disaster or political upheaval, do we have viable alternative suppliers in another geographic area? Do our suppliers practice sound risk management themselves?"
I believe the majority of supply chain risks are preventable. While insurance serves a useful role, it often will not fully compensate a company for lost sales, a drop in market share, out-of-work employees or even damage to its corporate reputation. The most progressive companies understand they have a responsibility to stakeholders to proactively take reasonable risk management actions to ensure continuous operations.
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