Supply Chain Risk – Managing the weakest link

0
2848
RISK MANAGEMENT WATCH By Robert Mbonu

By Robert Mbonu

The continued dependence on crude oil exports as a primary source of foreign exchange earnings makes the Nigerian economy vulnerable to domestic and external shocks from the oil and gas sector. By 2020, the government of Nigeria plans to have made significant progress towards achieving structural economic change and having a more diversified and inclusive economy. This will involve a major strategy to diversify the economy from oil as a major revenue earner to other areas like agriculture and solid minerals.

Thus Nigeria is projected to become a net exporter of key agricultural products, such as rice, cashew nuts, groundnuts, cassava and vegetable oil. Solid minerals will include 44 known types of minerals of varying mixes and proven quantities.

For this to work, the buyers of export items from Nigeria must be given some level of assurance that the items will be shipped to them on time in the agreed quantities, specification and quality. This introduces the various elements of supply chain risk.

A supply chain consists of the different activities that transform natural resources, raw materials and components into a finished product that is delivered to the end customer. For example, in producing sugar the supply chain might involve sugarcane farmers, processors, packaging manufacturers, distributors, wholesalers and retailers. It is a set of interconnected processes and resources that starts with the sourcing of raw materials and ends with the delivery of products and services to end users. Many organisations outsource major parts of their operations and support services.

For the government, the key supply chain elements must be managed if Nigeria’s exports of agricultural produce and solid minerals are to become a reality.

All kinds of uncertainties can cause problems in the supply chain. It is impossible to eliminate risk entirely, but adequate attention to risk management matters can reduce the likelihood and magnitude of any disruption to supply.

Due to the need for movement of goods in the supply chain, a common risk element is transportation and logistics. Nigeria’s transport infrastructure stock is inadequate for the size of the economy and constitutes a major cost and constraint for both large and small businesses. Investments in strengthening Nigeria’s infrastructure will make a significant contribution towards building a competitive economy.

In addition the supply chain, including the transport logistics, warehousing, border clearance processes and costs and all the attendant skills need to match up to the challenge.

Recent deregulation and investment has led to increased professionalism in and modernisation of the haulage and logistics companies and it is reported that there is good performance with outsourcing, sub-contracting and the holding of safety stock and supply chain diversity. But Nigeria has continued to consistently underperform and remain in the 4th percentile on World Bank’s Logistics Performance Index as reflected on poor rankings on:

  • Time delays in international shipment
  • Poor tracking and tracing capabilities
  • Poor logistics quality and competence
  • Efficiency of customs clearance process
  • Quality of trade and transport related infrastructure
  • Ease of arranging competitively priced shipment
  • Quality of logistics services
  • Ability to track and trace consignments
  • Frequency with which shipment reach the consignee within the scheduled time

Due to its global nature and systemic impact on the firm’s financial performance, the supply chain arguably faces more risk than other areas of the company. Risk is a fact of life for any supply chain, whether it’s dealing with quality and safety challenges, supply shortages, legal issues, security problems, regulatory and environmental, compliance, terrorism, weather and natural disasters.

The repercussions of supply chain disruptions to the financial health of a company can be far-reaching and devastating and thence the effect on the economy is affected.

Supply chain risk management like other risk management disciplines requires the same sequence of process;

  • Identify the context
  • Identify the risks (opportunities and threats)
  • Analyse and evaluate the risks
  • Take action to respond to the risks
  • Measure, monitor and communicate

Having identified the risks using some form of prompt such as the one above, it is then important to analyse the size of the risk in terms of likelihood and impact so that the risks can be prioritised for action. For supply chain risks, there are additional impact elements that need to be considered such as;

  • The likely duration of the interruption
  • The level of interference with the rest of the chain (can it cause other knock on threats / opportunities?)
  • How easy is it to be corrected?
  • The relative cost of the corrective action?

The scope and reach of the supply chain cries out for a formal, documented process to manage risk. A firm that is determined to succeed and maximise the opportunities that are presented in today’s Nigeria will have already embedded supply chain risk management into its armoury of good management disciplines.

Finally, evaluation should be undertaken to determine the actual risk exposures that are associated with increasingly complex supply chain arrangements. Insurance may be available to cover incidents such as fire, flood or earthquakes, but events such as poor quality of components, late delivery by suppliers which could be due to poor logistic infrastructure are generally not insurable.

Comprehensive enterprise risk management frameworks can be used to predict, and mitigate supply chain risks. Companies that proactively implement a supply-chain risk management program will be more resilient and prepared for the day when a “risk” becomes “real” and will stand the test of time.

  • Mbonu, FERP, CIRM(UK), HCIB, MsRM (Stern), studied Engineering, is an experienced Banker and Enterprise Risk Management professional. Earned a post graduate degree in Risk Management from New York University Stern School of Business, and is a member of the Institute of Risk Management -UK. Can be reached on 09092092046 (SMS Only); email: rm4riskmgt@gmail.com