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Page 416 DEFENSE COUNSEL JOURNAL–October 2012exerts control over the processes.For supply chain management,this could include orderquantities, batch sizes, stockpolicies, and return policies.Control risk arises from theapplication or misapplication ofinternal controls. 13Mitigation: It is essential for acompany to plan forcontingencies that may occur.The failure to prepare a plan tomitigate losses from aninterruption in supply chain is arisk in and of itself. 14 Supply Chain Confidence:Different departments such assales, customer service oroperations view the viability of asupply chain differently. As aresult, sales persons may ordermore than is required, or holdstock to avoid a shortage due toa lack of confidence in the chain.Operations may be unable toderive patterns on sales ortrends, layering the existinginefficiencies. 15Inability to Measure Demand:Forecasting demand is importantto quantifying units produced13 Id.14 Id.15 Martin Christopher and Hau L. Lee, SupplyChain Confidence: The Key to EffectiveSupply Chains Through Improved Visibilityand Reliability, Cranfield Univ. & StanfordUniv. (November 6, 2001), available atwww.gsb.stanford.edu/sites/default/files/documents/SC_Confidence_whtppr.pdf.and shipped. The inability toproperly assess demand orrespond to a change createsinefficiencies that can disrupt thesupply chain and result ofeconomic losses. This has beencharacterized as the bullwhipeffect, when demandinformation becomes distorted asit is transmitted up the demandchain. This can lead to excessiveinventories, higher operationalcosts and lower customerservice. 16A company’s internal infrastructuremust be geared toward efficientlymanaging its supply chain. Interruptionspotentially caused by internal risks arewithin the control of the company and,although complex, can be assessed,amended and improved upon. These risksare not likely to cause significanteconomic losses, result in litigation or bethe types of risks that a company wouldtransfer to a third party.External risks, those risks outside thecontrol of the company, can have asignificant impact on the supply chainand cause significant economic losses. Itis not difficult to consider the myriad ofexternal risks that could interrupt a supplychain. Political instability, naturaldisasters, dock strikes, cyber attacks, andterrorism all could have a devastatingeffect on supply chains across the world,16 Id.; see also Calvin B. Lee, Demand ChainOptimization: Pitfalls and Key Principles,Evant White Paper Series, (2003), available atwww.gsb.stanford.edu/sites/default/files/documents/Demand_Chain_Optimization_whtppr.pdf.
The Global Supply Chain Page 417with dire impacts to companies. Externalrisks are categorized as: Demand Risk: Potential oractual disturbances to the flow ofproduct, information, and cashemanating from within thenetwork between the focal firmand the market. 17Supply Risk: Actual or potentialdisturbance of the flow ofproduct or informationemanating within the network,upstream to the focal firm. 18 Geo-political Risk: Naturaland/or political risks that canoccur. This category includesevents such as natural disastersand political upheaval. This riskcan impact the firm directly orthrough suppliers and customers.The final category is the most unnerving.While all external risks are, by definition,outside the control of the company, geopoliticalrisks pose the greatest threat ofsignificant disruption or cessation of thesupply chain. A geo-political event couldhave devastating effects on the supplychain system of an unprepared company.Raw materials, supply routes,manufacturing and the end marketplacemay be eliminated for an extended period.II. He Who Fails to Plan, Plans to FailTo minimize its risks, a companymust fully understand the entirety of its17 See Braithwaite, supra note 11.18 Id.supply chain and, more importantly, itspoints of vulnerability. Conducting anobjective assessment allows a company toprepare for interruptions, create flexibilityin its supply chain and be able to respondin kind to potential disruptions.Mapping. First, a company should drawa map of its supply chain and considerwhat perils may arise that would interruptits supply chain. This may appear simpleand obvious but it is easy to overlook andeasy to make certain assumptions about asupply chain absent a clear and objectiveview of the chain as a whole.Consider a company that minescopper in Russia, refines the copper intotubing in the Middle East and distributesthe finished product throughout theUnited States. By mapping the supplychain and considering the potential perilsthat may occur, the company can choosewhat risks it will transfer and what risks itwill bear. Because mining and fabricatingare inland, they are unlikely to be affectedby coastal flooding or wind damage. Thelocation of these activities may beaffected by an earthquake, industrialaccident (Russia) or political unrest(Middle East).In the scenario described above, thecompany could take additional steps tomitigate potential disruptions. Thecompany could position inventory tobuffer against uncertainties of demand oruncontrollable environmental risks. Bylimiting shipment to the refining areaaccording to demand, the company couldlimit the risk of lost materials due topolitical unrest. The company could alsoshift refining elsewhere without having tore-direct significant amounts of materialsalready in transit.
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