COVID 19 Supplier Disruption Reveals Importance of Risk Analysis
Major manufacturers across a number of industries are facing severe supply chain disruptions as the COVID 19 virus continues to spread across mainland China. Apple, GM, Bosch are among the companies who have publicly indicated that they are concerned about the virus’ impact on their product supply chains.
I am not a supply chain expert and I am not criticizing any company’s supply chain selection and management. However, the current situation does shine a light on why the evaluation of risks is such a critical part of the site selection process.
When a company is considering a location for a new capital investment, risks must be evaluated. The best site selection consultants will conduct a risk mitigation analysis of every site option. At Strategic Development Group, we help our clients identify the risks, assess the probability of that particular risk occurring and the severity of the consequence. See visual.
Other times our risk analysis takes the process one step further. We will assign a financial cost to the consequence of a particular risk occurring. Taking into consideration the probability of all of the potential risks of a location and the financial cost of that risk occurring, and SDG can actually apply those additional “risk” costs to the project financial model. Let’s use natural disaster (such as a hurricane) as an example of a risk to Site A. SDG along with it’s client believes that there is a 40% chance that a hurricane could hit this location and require a shutdown. The client estimates that the shutdown will cost the company $30 million in lost revenues, supply chain disruption, etc. Then the total risk cost is $12 million. Adding this to the project cost model allows our clients to see the impact that risks might have on a project’s bottom line.
Of course, if the total risk cost does not outweigh the cost savings at a potential location then a company might be inclined to select a riskier location because it provides significant short-term cost savings.
Location consulting is more than a real estate transaction, it is a highly complex process that requires the evaluation of a multitude of factors and the ability to analyze and quantify vast amounts of information.