Clearly, it is extremely important that a supply chain outsourcing strategy identify risks. But HBR research concludes to have lack of any process to identify, prioritize, manage, and mitigate risks. In the HBR database of hundreds of companies, it was found that most firms ignore risks, sometimes with dire consequences. Their data show that when companies analyze global outsourcing decisions, they fall into three categories. Those who:
- add a risk assessment, 10%
- look at unit cost plus transportation only, 35%
- include inventory as part of the assessment, 55%
In other words, 90 percent of the firms do not conduct a risk assessment when outsourcing production. Yet, sourcing offshore carries myriad additional risks such as political instability, port disruptions, currency swings, demand swings, and more. Unforeseen events occur more frequently in very long global supply chains.
And it's not just the global environment that creates supply risk. There's plenty of it in almost every major initiative. For example, a supply chain professional from a toy retailer told of trying to implement a new fulfillment system that went far over schedule and budget. The Christmas spike exploded before the fulfillment system was complete, resulting in an inability to process orders. People throughout the company worked 50 days straight, including Sundays, to try to stay ahead, yet the firm was forced to send thousands of letters saying, "Sorry your toy order will not arrive before Christmas."
Do you think most companies have made real changes to their practices to reduce risk as a result of recent major disruptions?