Supply Chain Frontiers issue #30. Read all articles in this issue.
Given the high degree of market uncertainty that companies now have to deal with, finding ways to mitigate and eliminate risk in supply networks is no longer a matter of choice. Risk management (RM) has become an integral part of every business operation. Still, developing and implementing RM strategies is no easy task. The MIT Center for Transportation & Logistics (MIT CTL) has launched a research effort to help companies find their way through the RM maze.
The challenges to successfully steeling supply networks against disruptions are considerable. There is no standard template for RM and marked differences exist in approach from company to company. Some organizations have developed relatively sophisticated RM processes, while others – probably the majority – neglect or even ignore RM. Another complication is that RM covers many objectives, disciplines and operational areas: it encompasses planning for and recovering from disruptions, as well as a capability for short- and long-term competitive advantage.
Given these challenges, enterprises should not embark on the RM journey without knowing where they currently stand in this area of expertise, what their objectives and expectations are, where they need to be on the RM maturity scale, and how they are to get there. This is where the MIT CTL aims to offer some useful guidelines.
CTL’s research is developing a Progressive Risk Management Maturity Model (PRMM model) comprising four distinct maturity levels 1 to 4, with Level 4 being the highest level, as follows.
Level 1
Able to respond to most disruptions.
Profile:
- The firm has a mature business continuity planning (BCP) program with clearly defined rules for escalation and engagement, but its responses are primarily local.
Company Methods:
- Detailed process flows and task ownership, SOP (templates, instructions etc.)
- Understanding why companies decided to develop RM capabilities, and what risk factors they identified as important.
Level 2
The company has the ability to minimize disruptions and quickly recover even from serious incidents. It can actively manage response readiness locally through quantitative assessment of tactical and operational risks.
Profile:
- Advanced BCP practices are in place
- The company has regular drills to maintain readiness and support a holistic view of recovery operations that spans people, processes, and products.
Company Methods:
- Updated BCP Score cards and audits;
- BCP Simulation exercises;
- Monte Carlo simulation to carry out simple what-if scenarios.
Level 3
The company has integrated planning and execution globally to support responses and redeploy resources based on real-time information from sensors.
Profile:
- The firm has a detailed understanding of regional challenges facing business operations, enabling it to develop a global view of risk sharpened by local nuances;
- There is an awareness of assumptions and potential threats;
- The firm has identified the key external and internal sensors that need to be constantly monitored;
- It is an adaptable enterprise with a culture of readiness that permeates all levels of the organization.
Company Methods:
- Obtain detailed knowledge of regional challenges and identify regional differences in how companies perceive and prioritize risk and the RM strategies deployed;
- Scenario planning for future exploration;
- Aggregated supply network simulation for profiling the impact of disruptions;
- Real-time trend watching system.
Level 4
Risk management is a strategic initiative that the company considers a source of competitive advantage. Operational performance, risk, and financial performance measures are integrated for operations management and external reporting purposes.
Profile:
- The firm has an in-depth knowledge of financial implications (cost and revenue) of decision drivers and activities;
- The organization views risk management as a source of competitive advantage;
- It also knows the value of risk from the perspective of different stakeholders including investors.
Company Methods:
- Activity Based Costing;
- Detailed supply network simulation with cost and revenue data;
- Metrics to communicate risk levels to C-level executives for assessing the impact of RM on the decisions of top management and hence corporate strategy.
Using the PRMM model as the basis, the research will primarily focus on the Methods sections. The goal is to develop processes and tools that will help organizations achieve the appropriate level of risk management maturity that is best suited for their intended business objectives. The tools will include possible guidelines – including rankings of supply network risks – which companies can use to help them develop RM programs.
For more information on the RM research effort and how to participate please contact the project head, MIT CTL’s Dr. Mahender Singh, msingh@mit.edu .