Supply chains are becoming increasingly complex. Yet many procurement teams are not working to prevent and manage disruptions that could prove costly. In a recent webcast, “Preventing and Managing Supply Chain Disruptions,” Tanel describes costs of disruption to the supply chain and explains why it’s important for procurement to learn to identify vulnerabilities and develop a plan to mitigate risk.

1. Identifying Vulnerability is Step One to
Mitigating Supply Chain Risk
By Susan Avery, Chief Editor at My Purchasing Center
January 23, 2014 at 1:01 PM
Supply chains are becoming increasingly complex. Yet many
procurement teams are not working to prevent and manage
disruptions that could prove costly.
“As the supply chain gets longer and involves more players,
countries, modes and logistics handoffs, it exposes more
potential vulnerabilities,” says Thomas L. Tanel, President and
CEO of the CATTAN Services Group in College Station, Texas. “That does
not mean volatility is inevitable, but it does mean it is more possible.” Tanel
serves as Chair of the ISM Logistics and Transportation group.
In a recent webcast, “Preventing and Managing Supply Chain Disruptions,”
Tanel describes costs of disruption to the supply chain and explains why it’s
important for procurement to learn to identify vulnerabilities and develop a
plan to mitigate risk.
Referring to a study, The Effect of
Supply Chain Disruptions on Longterm Shareholder Value, Profitability
and Share Price Volatility, Tanel shows
what the vulnerabilities can mean to an
organization. According to the study
the average effect of supply chain
disruptions in the year leading to the
disruption includes a 107% drop in
operating income, 7% lower sales
growth and 11% growth in cost. In
addition, share price volatility in the year after the disruption was 13.5% higher
than in the year before the disruption.
Procurement teams plays a key role. Of them, Tanel asks, “Do you want to
prevent and manage supply chain disruptions or would you rather resolve
them after the fact?”

2. While the response appears obvious, teams understandably can become
distracted by other priorities. Tanel suggests procurement take the long view
and focus resources on mitigating risk.
“Managing the risk provides the early warning systems that enable fight, flight
or cognitive processes to kick in,” he says. “The sooner procurement teams
have information, the sooner they’ll be able to respond.”
Risk Aware
In his presentation, Tanel uses this
definition of risk: Exposure to a hazard
or the chance of loss.
Procurement teams can limit the
impact of supply chain disruptions on
the business by identifying the risks
within the supply chain and developing
a plan to mitigate them. As he sees it,
there are two types of risk to consider:
External and internal.
External risk consists of:
•
•
•
Demand risk--caused by unpredictable or misunderstood customer or
end-customer demand.
Supply risk--caused by any interruptions to the flow of product, whether
raw material or parts within the supply chain.
Environmental risk--from outside the supply chain, usually related to
economic, social, governmental and climate factors, including the threat
of terrorism.
Internal risk includes:
•
•
Process risks--caused by disruptions of internal operations or
processes.
Organizational control risks--caused by inadequate assessment and
planning, which amount to ineffective management or caused by
changes in key personnel, management, reporting structures or
business processes, such as the way procurement communicates with
suppliers and customers.

3. Given that supply chains have become more complex--due to growth of such
procurement initiatives as outsourcing and low cost country sourcing-organizations are seeing an increase in the vulnerability of their supply chains.
Tanel uses a Kairos Commodities risk management survey to illustrate three
areas where organizations are experiencing an increase in risk:
•
•
•
Macro-economic uncertainty. A single risk event can easily disrupt at
least one of the supply chain flows. In most cases, the impact of
disruption can be observed along the supply chain. Any hiccup will
cause delays and even disruption. Recent incidents such as the Arab
spring protests, the earthquake and tsunami in Japan and the floods in
Thailand show how such disruptions can severely affect even the most
stable supply chain.
Commodity price volatility. Commodity prices exploded from 2002 to
2011, with an average annual growth rate of 15% for gold, silver, oil,
aluminum, copper, coffee, sugar, rubber, cotton, corn, wheat, lumber
and steel.
Currency risk. In June 2008, Volvo Cars reported a 28% reduction in
sales compared with the same period in the previous year, with the
biggest loss of about 50% in its SUVs. Fredrik Arp, then CEO, stated
that “the weak dollar reduces the revenue and it will further reduce
opportunities for R&D.”
Procurement can limit the impact of supply chain disruptions on the
organization by identifying risks within the supply chain and developing ways
to mitigate them, Tanel says. “Make this part of your overall supply chain
continuity plan.”
Tools that may help include:
•
•
ISO 22301 and 22313:2012 Business Continuity Management which
specifies requirements to plan, establish, implement, operate, monitor,
review, maintain and continually improve a documented management
system to protect against, reduce the likelihood of occurrence, prepare
for, respond to and recover from disruptive incidents when they arise.
ISO 31000:2009 Risk Management provides principles, a framework
and process for managing risk, and can be used by any organization
regardless of size, activity or sector.
“Although prevention and being prepared go a long way toward ensuring
supply chain continuity, disruptions can still occur,” Tanel says. “Creating a

4. business response plan allows an organization to effectively manage the
business’s immediate response if the supply chain is disrupted.
“An organization with a resilient and responsive supply chain,” he adds, will
have a significant competitive advantage over other businesses.”
Volatility. Uncertainty. Complexity. Ambiguity.
VUCA, originating in the military and adopted by business, is a way to assess
and provide for the changeability of events. Thomas L. Tanel of the CATTAN
Services Group in College Station, Texas, sees VUCA as a tool for
procurement, “a strategy for handling unavoidable changes.” The term is the
acronym for:
Volatility. The nature and dynamics of change, and the nature and speed of
change forces and change catalysts. Volatility is mitigated by vision, a clear
cut master statement of where an organization is headed. When confronted
with volatility, communicate clearly and make sure intent is understood, Tanel
says.
Uncertainty. The lack of predictability, the prospects for surprise and the
sense of awareness and understanding of issues and events. Uncertainty
yields to understanding, the deliberate ability to stop, look and listen. In
uncertain situations, make sure to get fresh perspectives and remain flexible,
he says.
Complexity. The multiplex of forces, the confounding of issues and the chaos
and confusion that surround an organization. Complexity is checkmated by
clarity, the deliberate effort to make sense of the chaos. In complex situations,
collaborate with others and don’t seek permanent solutions, Tanel suggests.
Ambiguity. The haziness of reality, the potential for misreads and the mixed
meanings of conditions. Ambiguity is matched by agility, the ability of supply
chain professionals to communicate across people and organizations instantly
and to move quickly in applying solutions. Listen well, think divergently and
set up incremental dividends, he says.