What is Supply Chain Risk Management?
Supply chain risk management identifies, assesses, quantifies, and minimizes potential risks associated with any part of the supply chain. It involves a systematic process to identify and evaluate the impact of risks on business operations and develop mitigation strategies or plans for their effective prevention and handling.
Supply chain risk management aims to reduce costly delays, improve operational efficiency, drive better strategic decisions, and reduce overall risk. It focuses on three major areas: supply chain security, supplier management, and logistics/transportation risk management.
Risk Factors
Supply chain disruptions expose every company to internal and external risk factors. Here are the different categories for each risk.
Internal
- Manufacturing risks result from disruptions in internal processes or operations.
- Business risks may arise from changes in key employees, management, reporting structures, or purchasing processes.
- Planning and control risks result from inadequate evaluation and planning.
- Failure to prepare for emergencies or find alternate solutions results in mitigation risks.
- Cultural risks can arise from companies’ tendency to conceal or postpone undesirable information.
- Data breaches and cyber-attacks can result from insufficient cybersecurity risk management policies and controls.
External
- Consumer or end-customer demand risks arise from unforeseen or misinterpreted demands.
- A disruption in the flow of raw materials or parts within your supply chain creates supply risks and can affect the lead time.
- Economic, social, governmental, and climate issues, as well as the possibility of terrorism, are environmental risks that originate outside the supply chain.
- Variables such as a supplier’s financial stability or managerial expertise or the sale of a supplier’s company can result in business risks.
- A supplier’s physical facility and regulatory compliance contribute to physical plant risks.
Examples of Risks in Supply Chains
Supply risk encompasses potential issues involving suppliers, vendors, transporters, retailers, and external entities that can affect the successful execution of operations, performance, sales, and job functions.
These risks can lead to quality problems, legal liabilities, and reputational concerns if not managed carefully or supported with appropriate controls. Here are some examples for further consideration:
- Fluctuations in Price – Changes in supply or demand, movements in exchange rates, and customs tariffs can all contribute to price hikes, threatening a business’s financial projections and profitability.
- Material Shortages – Missing components, materials, or parts can negatively impact the manufacturing of a product. Such shortages may only be temporary if their supplier can keep providing them; otherwise, they could become long-term issues that hinder production.
- Supplier Relationships – If litigation or any other disagreement arises with your supplier, it can disrupt the supply chain, leading to delivery delays and financial losses.
- Quality Failures – Poor quality control can lead to product defects that must be fixed or recalled, resulting in losses for the business.
- Delivery Failures – Delayed shipments from suppliers or third-party vendors can lead to missed deadlines and dissatisfied customers.
- Supply Shocks – Global or industry-wide disruptions, such as those caused by pandemics, natural disasters, labor disputes, wars, and trade embargoes, can dramatically decrease the supply of goods overnight.
Different Risk Management Strategies
Several strategies have been developed in recent years to manage supply chain risks. The most common include:
Take Advantage of PPRR Risk Management Template
Prevention, Preparedness, Response, and Recovery (PPPR) is a widely accepted risk management strategy organizations use in the supply chain. PPPR can be highly beneficial for maintaining business continuity planning.
Boost Supply Chain Risk Governance
Organizations should enhance their risk governance capabilities by monitoring suppliers and setting up emergency response protocols. Strengthening cybersecurity defenses and using advanced technologies like big data analytics, blockchain, and artificial intelligence can help them anticipate and monitor supply chain risks.
Systematically Monitor Risks
Investing in a digital platform to oversee your supply chain offers safety, comfort, and insight into how to optimize operations. By automating the risk monitoring process, you can maintain consistency and ensure that nothing slips through the cracks.
Centralize Data
Too many software solutions can impede your risk management efforts if you keep business data scattered across multiple systems. Invest in a comprehensive solution that houses all your data in one centralized, organized warehouse to enable you to access analytics and predictive analytics and easily share information with others.
Steps in Supply Chain Risk Management Process
Think about balancing operating expenses under standard conditions with costs under extreme conditions. Typical risk management frameworks look like this:
Identify Risks
Identifying risks is a significant part of the risk management process. Start by mapping out your current supply chain and determine which operations are most susceptible to threats. Then, deep dive into each area of the supply chain to identify all potential risks.
Compile Risk Scores
Comprehending your risks, the probability of each occurring at a specific location or channel, and its implications on your supply chain are vital. For this reason, risk scoring offers instant insight into which issues need to be tackled first. This method proves to be exceptionally useful in keeping up with potential risks swiftly and efficiently.
By assigning risk scores to activities in the supply chain, it becomes easier to prioritize risks and make informed decisions. You can use numbers, colors, or other visuals to illustrate which risk is most important at any given time.
Define Mitigation Strategies and Response Plans
Too many companies cut corners when creating their contingency plans, often due to a lack of time. The most effective and thorough method is to dedicate a lot of time to assessing the possible outcomes for each risk, pondering “what if?” no matter how arduous this might feel. Inevitably, having an agreed-upon plan that everyone comprehends ensures a prompt response if future risks occur.
Businesses can be ahead of the game by utilizing this form of modeling, ready to take action quickly if a crisis suddenly arises. Even though it may not happen as predicted, planning for possible outcomes will put you in a good position if and when it occurs.
Develop a Plan
Constructing a comprehensive plan that considers the data collected from previous steps. While each business may have its individualized risk management strategy, The Institute for Supply Management suggests incorporating the following five components into the blueprint:
- Looking for other providers
- Discussing with key suppliers
- Increasing supplier eligibility
- Purchasing more supplies
- Discussing with big suppliers
Create Your Own Supply Chain Risk Management Checklist
FAQs About Supply Chain Risk Management
Supply chain risks are caused by poor communication and collaboration between entities in the chain. Poor visibility, lack of ownership, chaos, just-in-time practices, and inaccurate forecasts all contribute to these risk factors.
Subpar supplier performance poses the greatest danger to any business and should be prioritized when considering potential risks. While analyzing a vendor’s fiscal stability is always helpful in determining their aptitude, it is not the only factor to consider. Other performance facets, such as delivery accuracy, production quality, and ability to handle customer complaints, must also be considered before making final decisions.
The supply chain risk assessment checklist starts with determining how your organization defines risk. It’s different for every company, depending on the business and the industry. An assessment determines what risks are present, how likely they are to occur, and how to prevent them.
Getting the right products to customers at the right time and place requires efficient supply chain management. By optimizing distribution systems and maintaining accurate inventory records of finished goods, businesses can ensure that their customers are always satisfied with timely deliveries. It helps establish trust between buyers and sellers while strengthening relationships within the industry.
Rob Paredes
