Many businesses in the food industry assume that, because they have plans to deal with some known risks, they have a robust risk management process. This is an oversimplification and one that could, and at some point probably will, prove very expensive. In our experience few businesses manage risk with the rigour, energy and focus required; few businesses can truly say, “Yes, we have a robust risk management process.”
What is risk? Risk is the possibility that an event will occur which leads to an undesirable outcome.
Risk management is the identification, assessment and prioritisation of risks followed by the coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.
There are numerous examples of businesses which believed they managed risk, but could not mitigate the effects of predictable events.
Recently, as a result of logistical issues, a major chilled food client ran out of a key ingredient. The result was not just a reduction in profit, but more importantly the loss of credibility with a strategically important customer. Not untypically they put in place actions to ensure that, should the same problem recur, they would be ready. This is reactive management but it is not risk management. Risk management is defined by the ability to deal with events that have not previously occurred.
Figure 1.0 (above) shows categories of risk that every business should address. Few would argue with these, yet few seriously address them. What, for example, does the FT tell us on the 31st July?
“US corn crops have been weakened by relentless heat and the worst drought in half a century. Analysts have torn up predictions of a record US harvest. Now they are focusing on which consumers, from pig farmers to ethanol refiners, will capitulate first and use less grain.”
How many businesses are ready for this? Is this a one-off? Perhaps you remember that two years ago Russia imposed an export ban on wheat which sent prices soaring. It may not be the same risk, but it is the same type.
Supply chain risk goes far beyond environmental risk; it also includes areas such as:
- Logistics: strikes, fuel price fluctuations, availability or failure of cold storage, shipping piracy…
- Planning: incorrect master data (routings, BOM, output rates…), extreme demand fluctuations, material availability issues…
- Procurement: Security of supply, commodity price fluctuations, inbound material quality issues…
Ultimately, ignoring supply chain risks increases cost.
This summer, R&R Ice Cream recalled three of its Tesco products. The costs associated with the problem, fines, reverse logistics, disposals and lost margin, are just the start. They have risked their reputation and their brand. They have risked their future.
The right way.
As was said earlier, risk management is about identification, mitigation and contingency planning. Done properly, the cost of doing it is less that the cost of avoiding it.
To finish on a positive note: Carr’s Flour Mills have announced a £17m factory build in Kirkcaldy. This will both secure wheat supplies and enable them to place orders when prices are favourable. Their customers value the security and cost stability. The business can operate with confidence, focusing on their strategic goals.
Written by Sam Rabi, Supply Chain Principle at Coriolis
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