Volatility Index Underscores Need For Supply Chain Risk Management

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VIX, the index used by The Chicago Board Options Exchange to calculate anticipated market volatility, recently dipped after hitting a nearly three-year high in the fall. Given recent news headlines, the triggers that prompted the index spike are relatively easy to imagine – war in the Middle East, the European economy, potential softening in the Chinese economy, and concerns surrounding Ebola are among the global issues that come immediately to mind.

But business volatility is not just about potential downsides; it is about peaks and valleys – the gyrations that exist in today’s business environment. Consider the U.S. manufacturing index. It sagged in September, but picked up steam in October and continued that trajectory in November

Commodity prices continually shift. Oil prices are relatively low at present, but sugar spiked last month. In fact, the markets saw sugar soar more on one November day than it had in over six weeks -- reportedly in response to a drought in Brazil that damaged the country’s sugar cane crop. Brazil produces one-fifth of the world’s sugar, and the ripple effects for industries that use the commodity are no doubt expected.

So it is no wonder that more than half of the 1,000 executives at large global companies who participated in Accenture Strategy’s recent supply chain study plan to boost their investment in supply chain risk management, with one-quarter of them expecting to do so by 20 percent or more. The executives are familiar with the risks that caused gyrations in the VIX index. Those issues are on the minds of business executives who see implications for their supply chains. Many worry, as we saw in our study, that the effect of these risks and changing business circumstances could be felt across their supply chain from their quality, planning, plants, skills, and talent, to the success of their sourcing and procurement, after-market services and even their project engineering and development.

While there is no one-size-fits-all approach to supply chain risk management, companies that make operations risk management a priority and drive centralized responsibilities for risk management are typically in the best position to weather the business challenges that might otherwise break a weak link in their supply chain. 

Interestingly, those were two of three practices that stood out among seven percent of the companies which participated in the supply chain study mentioned above. That small group of respondents, the supply chain management leaders, reported supply chain risk management returns in excess of 100 percent.

Those great returns also are the result of aggressive investment in supply chain risk management. Six out of 10 leaders expect to increase their supply chain risk management investments by at least 20 percent. 

Companies are building in capacity to tap into alternate suppliers for parts, commodities and even production. Companies, like Bosch, as reported by Handelsblatt, (“Risk Factor Just in Time,” September 9, 2014) “always have two sources” for important parts which can aid their risk mitigation. Some contract with specialized providers of risk monitoring services.   

Others use predictive analytics to create price models that help them plan for price fluctuations. For instance, a semiconductor manufacturer who needs silicon wafers factors pricing shifts into its annual budgeting and uses the information they derive from simulating pricing scenarios to optimize their pricing structure and mitigate risks tied to cost management.

However, despite the usefulness of scenario planning, relatively few (29 percent) of the more than 1,000 companies we surveyed actually create “playbooks” that outline actions to take within various parts of their organization when volatility drives changes or the unexpected occurs.

Much more common among those surveyed is the monitoring of risks and deployment of mitigating actions (58 percent) or the identification of alternate supply chain suppliers or partners who can fill operational gaps when a crisis arises. 

While benefits associated with strong supply chain risk management are clearly recognized, no company is able to completely eliminate risk. However, a demonstrated commitment to operations and supply chain risk management can help organizations protect themselves against the adverse impacts of business disruption and increased level of demand and supply volatility – and in the process, create the opportunity to increase stakeholder confidence and economic returns.

About the Author  Stephane Crosnier is a managing director in Accenture Strategy – Operations. Based in Paris, Stephane has more than 16 years of experience working with companies in the areas of business and operations strategy. Accenture is one of the world’s leading organizations providing management consulting, technology and outsourcing services, with more than 305,000 employees; offices and operations in more than 200 cities in 56 countries.

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