Baker Tilly: The Impact of SCALE on Risk Management

SCALE, the US Department of Commerce's recently-unveiled supply chain diagnostic tool, promises to deliver unprecedented visibility into vulnerabilities by analysing more than 40 distinct indicators spanning technological, geopolitical and logistical threats. 

These indicators may include the level of disruption risk an industry faces and its ability to recover, as well as the significance of certain industries to the federal government.

While national security concerns mean the tool will remain proprietary, the tool generates detailed heat maps highlighting areas of concern across various industries.

SCALE represents one component of an evolving risk management landscape that is increasingly leveraging AI to strengthen organisational resilience, according to industry experts.

"The Commerce Department's SCALE tool is one of the first tools we've seen that offers an additional lens for leadership teams within an organisation to consider risk specifically to the supply chain," notes John Rogula, Managing Director with the Risk Advisory Practice at Baker Tilly.

"However, it's essential to keep in mind that it's only one aspect of the larger risk landscape."

Contextualising risk within enterprise strategy

John emphasises that industries and individual companies vary significantly in their risk profiles and management capabilities.

"There might be a risk on the SCALE heat map with a root cause that an organisation is very good at managing," he says. "Therefore, that risk would not be considered as severe for this organisation as it would for another with less developed risk management capabilities."

This variability underscores the importance of integrating supply chain risk assessment tools within a comprehensive enterprise risk management (ERM) framework.

Modern ERM approaches must consider operational, strategic, financial, technological, legal and regulatory risks, alongside emerging ESG considerations that span multiple business domains.

John contends that using such a tool is helpful not only in forecasting what risks are on the horizon, but also in determining how to appropriately plan for them. He points to the COVID-19 pandemic, which highlighted crucial lessons about traditional risk assessment approaches. 

"Before 2019, many organisations had such an event on their risk register," John continues. "However, the low probability of occurrence diminished its position on the heat map because equal weighting was given to impact and likelihood.

"As we well know in hindsight, COVID had a devastating impact on supply chains across many industries. The lesson learned is that equal weighting for impact and likelihood is not always the best view of risk."

This experience has led to a fundamental shift in risk evaluation methodology. Sophisticated risk management tools now apply special consideration to high-impact, low-probability events that could potentially devastate supply chain resilience.

The AI revolution in risk management

Perhaps the most transformative development in supply chain risk management has been the integration of AI.

"The advent of AI has turbocharged enterprise risk management, particularly around black swan events," explains John.

"Use of AI in risk management tools has completely enhanced our ability to refine the impact and likelihood probability of the risk as assessed by organisational management, as well as enabled our ability to determine how quickly an organisation may feel the impact should it occur."

This enhanced capability proves particularly valuable when managing supply chain risks because AI-powered tools can inform strategic decisions. 

Clearly, modern risk management tools must be dynamic, continuously calibrating to account for emerging threats and organisation-specific tolerance levels. This is particularly crucial when dealing with volatile geopolitical risks that could impact supply chains.

"Consider an inventory management strategy," adds John. "An AI-enhanced supply chain assessment around raw materials needed to make a company's products would inform inventory strategy, customer and product demand prioritisation, and what the company should produce if it has a limited inventory of raw materials.

"Such an assessment would allow the company to determine the potential impacts on the supply chain and develop a coordinated resilience strategy around what is critically important across the entire organisation."

Prioritising high-impact events

The bottom line, says John, is that many organisations are focused on the risks most likely to happen rather than prioritising those with the potential to have the largest impact.

As organisations navigate an increasingly complex risk landscape, the integration of sophisticated tools like SCALE into broader ERM strategies becomes essential.

The key to effective risk management lies in leveraging AI-enabled tools while maintaining a comprehensive view of potential threats. The approach enables organisations to develop coordinated resilience strategies that protect critical operations across the entire enterprise, ensuring they remain prepared for both likely disruptions and potentially catastrophic black swan events.

Explore the latest edition of Supply Chain Digital and be part of the conversation at our global conference series, Procurement & Supply Chain LIVE.

Discover all our upcoming events and secure your tickets today. 

Supply Chain Digital is a BizClik brand.