Supply chain managers have been mitigating risk for as long as they’ve been in operation, by predicting the likelihood a disruptance will occur in a firm's operations and planning accordingly. Typically, these disruptions have included forecast errors, poor supplier performance and transportation setbacks. Because most firms have accrued historical data on their expected risks, this sort of risk exposure management has usually worked well for smaller firms. But as companies expand to the global arena, a firm’s risk exposure compounds, calling for new and inventive ways to prioritize risk.
How can supply chain managers mitigate unforeseen, low-probability, high-impact events like fires or devastating storms (like hurricane Katrina)? There is little, if any, historical data on the probability of unforeseen events, making risk management increasingly difficult for supply chain managers. There is surprisingly little correlation between how much a firm spends annually on risk mitigation at a particular site and the impact that site would have on the supply chain. Most risk mitigation has been focused on a supply chain’s ‘strategic suppliers’ where expenditure is high and services are necessary. By failing to focus on other, less visible facets of the supply chain, leaders expose themselves to hidden risks and unnecessary waste. Thanks to the new Risk Exposure Index, that can now change.