4 Types of Supply Chain Risk

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In Brief

There are four types of supply chain risk. Bundled up under an acronym, they can be recognized collectively as VUCA for Volatility, Uncertainty, Complexity and Ambiguity.  Ensuring that the organization is prepared to cope with unforeseen changes, it is always a challenge to come up with contingency plans for down swing pendulums.  It is vital that organization leaders as well as employees at every level collaborate in fine-tuning modus operandi to attain a level of agility and flexibility that weathers the storms and come out on top.

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     Mark Pierson is Corporate Sourcing and Logistics Executive of NBC Universal, an American multinational media conglomerate and one of the world’s largest media and entertainment company. His major areas of responsibility include formulating and designing strategies for supplier sourcing, implementation, contract management and various processes to ensure efficient and effective logistics processes for operating units scattered in numerous locations all around the world, e.g., television and theatrical production and news and sports.

It is a known fact that risk is inherent in all types of businesses but particularly in companies with diverse business operations.  The enormous volume of risk that needs to be coped with has proven to be a formidable threat to organization, including a world class such as NBC Universal. Tangled up in complicated supply chain diversifications, ranging from production, retailing, food services and others, Mark Pierson’s routine every morning is dedicated to plowing through newspapers, applying the so-called VUCA approach in categorizing different risks and finding a way to properly respond to them.

In so doing, two questions have to be answered:
1.  How much do you know about the situation?
2.  How well can you predict the results of your actions?

Mark Pierson shared his experience in the area of supply chain and logistics risks in his talk last year on “Seeing the Big Picture: Gaining Visibility Across Your Supply Chain”.

Volatility

Volatile situations could be somewhat agitating for us as they entail rapid, unpredictable changes that often catch us off guard.  Still, they are not beyond our understanding.  In other words, plans and strategies can be made with the objective to alleviate the volatility impact.  According to Mark Pierson, natural disasters may be impossible to predict but (the impact of) business disasters can be mitigated provided you focus on maintaining a robust network of suppliers, distributors and efficient and effective transportation methods covering, for example, current disruptive innovations, be they big data, IoT, blockchain or others.

Uncertainty

In an uncertain situation, even if you are aware of its cause and effect, you are still unable to know in advance what is bound to happen (despite the fact that you know what has caused it).  The reason might be because your data is either inadequate or unreliable.  As an example, Pierson cited the incident when NBC Universal ran its European operations from the UK all the while knowing full well that the move would definitely have an effect on its business.  Only, they had yet to find out the extent of the exact impact.    As a result, we do need to collect as much information as possible while frequently asking questions, keeping an open mind and practicing empathy so as to understand what lies behind others’ or other businesses’ decisions.

Complexity 

Complexity arises when an organization is caught up in circumstances associated with diverse variables whereas the total correlation or interconnection of such variables is almost beyond our understanding.  Given the diversity, the list of things to be taken into consideration for our decision-making can be too long.  Perhaps we can understand why something is happening but simply cannot do anything about it.

Pierson cited as an example the more than 40 per cent increase in delay for container ships at Yangshan Port near Shanghai due to heavy fog in April 2017.  The incident proves that, while being able to predict the impact or extent of damage caused by weather conditions, one is unable to control another country’s infrastructure.    The best way to alleviate the impact of a complex situation is to simplify the issue to its core problem and use systematic thinking to understand interconnected variables so as to prevent a bigger issue.   As mentioned above, there are diverse variables affecting this particular situation.  We need to be able to predict the extent of impact each of them could cause and select a solution from there.  This can help mitigate the impact caused by complexity.

Ambiguity

An ambiguous situation can be compared to Donald Rumsfeld’s “unknown unknowns” because, whenever the situation is ambiguous with unclear variables, we are unable to get to the core of the causal relationship of each individual variable.  Thus, what may happen is open to more than one interpretation.  For example, we decide to invest in or diversify into products outside the organization’s core competencies or penetrate new markets unknown to us without having any knowledge or information.  While not being able to know what strategy to use to succeed, we nevertheless must balance ambiguity with agility, be able to adapt quickly, learn from mistakes and keep seeking new ways to conduct business including empowering business networks at every level of the organization.

It is clear that VUCA prompts us to always be prepared for unexpected situations – a challenge for any organization to have its contingency plan ready.  Still, it is also clear that VUCA derives from external factors beyond our control.  Thus, we cannot expect past decisions to put a definite end to all negative aspects in conundrums.  We can, however, alleviate the severity.  Leaders and team members from top to bottom throughout must play a part in fine-tuning business strategies in light of optimizing agility and flexibility as they venture the era of IoT.

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Compiled by BLOG.SCGLogistics

Reference and picture credits: generisgp.com, nbcuniversal.com, bangkokbiznews.com, pexels.com

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