Supply Chain Risk Management: Ensuring the Stability of Your Business
The supply chain is the beating heart of a company’s operations, and like a well-oiled machine, it must run smoothly and efficiently in order to keep a company alive and thriving. Any disruption to that well-oiled machine can bring your company’s operations to a grinding halt.
The reality is that risks to the supply chain are not new, but the level of uncertainty and complexity has increased as the world has become more digitally reliant and interconnected, and large-scale instability looms in nearly every corner, from the economy to the environment.
That’s where comprehensive supply chain risk management comes in.
Effective supply chain risk management (SCRM) can have far-reaching benefits throughout a company. A well-executed SCRM program can help you avoid bottlenecks in the supply chain, safeguard relationships, and ensure you’re operating legally and ethically.
To achieve this, businesses need to identify, assess, and mitigate risks throughout the entire supply chain, from suppliers to end customers.
In this article, we cover everything you need to know about supply chain risk, including the impact and the correct framework, techniques, and best practices for building effective supply chain risk management strategies.
Types of Risks in Supply Chain Management
The supply chain involves several moving parts, and businesses are exposed to a wide range of risks that may result in delays and additional costs. The two main types of risks that businesses may encounter are internal and external risks.
Internal Supply Chain Risks
Internal risks are those that a company has control over, and thus, can anticipate and mitigate. Organizations can use software and analytics to track trends and generate insights, such as key performance indicators (KPIs), to monitor possible risks.
The various types of internal risks include:
- Manufacturing risks: These refer to the possibility of a crucial element or process being disrupted, causing delays in the production schedule.
- Business risks: Internal business risks result from errors within the supply chain management, reporting, or other processes.
- Planning risks: This comes from inaccurate predictions, estimates, and poor control strategies.
- Contingency risks: These risks occur when a business lacks proper contingency plans to mitigate potential risks throughout the supply chain.
- Legal and regulatory risks: Compliance with international laws and regulations, as well as those of the countries in which companies operate, is crucial for organizations and their supply chains. This can prevent them from suffering reputational damage, legal penalties, and financial losses.One of the most common compliance risks faced by companies involved in the global supply chain is unethical labor.
External Supply Chain Risks
Global supply chains involve several external organizations and vendors, presenting new opportunities for disruptions. It makes it challenging to anticipate and prepare resources to mitigate possible hazards.
The most significant external supply chain risks include:
- Supply risks: These risks affect the inbound supply chain, where the availability or quality of parts and finished goods is delayed or canceled. This can result in supply disruptions that can affect the rest of the supply chain.
- Demand risks: These affect the outbound supply chain, where unexpected changes in demand can disrupt the normal flow of goods or services. This can lead to issues like overstocking or understocking products.
- Environmental risks: Risks that originate outside the supply chain and are typically tied to economic, social, governmental, and climate issues. For example, bad weather conditions that require freight shipping to wait days until it is safe enough to carry out deliveries.
Other Supply Chain Risks
- Financial risks: These can arise from both external and internal factors. External factors like unfavorable exchange rate fluctuations can significantly impact trade and funding across borders. It is also crucial to consider the cost of supplier instability or contractor bankruptcy, which can be an overlooked financial risk.On the other hand, internal factors can also bring about financial risks, such as budget overruns, limitations in finding funding sources, constructive changes, and missed milestones.
- Operational risks: These risks can also arise from both internal processes and external factors. Operational risks refer to the potential for a business to experience financial losses from its daily operations.
Impact of Risks in SCM
Supply chain management is a critical aspect of business operations. But supply chains are not immune to risk, and any disruption can have a significant impact on the overall business operations.
Risks such as natural disasters, political instability, and other unforeseen events can cause disruptions in supply chain operations. These disruptions can result in delays in the delivery of goods and services, leading to customer dissatisfaction and loss of revenue.
For instance, if a company’s supplier experiences a natural disaster that halts its operations, the company may face difficulties in sourcing the necessary materials to continue production.
Supply chains can also face a hit to their brand reputation from risks such as unethical practices by suppliers, safety issues, and product recalls. Consumers are more aware than ever and incidents like these can cause consumers to lose faith in the company’s offerings. Which, in turn, can lead to a decline in sales.
For example, if a company’s supplier is involved in child labor misconduct, the company utilizing them can face severe backlash from consumers and may even face legal repercussions.
The impact of financial risks such as price fluctuations, transportation delays, and quality control issues can increase costs for companies. If a company’s shipment is delayed due to logistical challenges, it may incur additional costs in storage, insurance, and rescheduling delivery.
Similarly, if a supplier fails to meet the required quality standards, the company may have to spend more money on rework and quality control measures.
One of the biggest risks that supply chains can face is lost revenue and market share. There is the possibility that customers may switch to competitors if they experience delays in product delivery, subpar product quality, or known unethical practices from the company.
This not only results in damage to brand reputation but also lost revenue and can sending your customers to your competitors – something no business wants to face.
On the whole, risks to supply chain management can have considerable consequences for a business, from its operations to brand reputation to lost revenue.
Framework for Managing Risks in Supply Chain
Insolvencies, natural disasters, sanctions, or global disputes – there are multiple causes of supply chain disruptions. To address and manage supply chain risk, it’s important to implement a comprehensive supply chain risk management strategy.
1. Identify and Document Risks
The first step is to identify and document all potential risk factors in the supply chain. This can be achieved by mapping out and assessing the value of major products.
Each node of the supply chain, including suppliers, plants, warehouses, and transport routes, should be assessed in detail. Risks should be entered on a risk register and tracked rigorously on an ongoing basis.
2. Assess Impact and Likelihood
After identifying risks and gathering your risk data, it’s important to understand how likely each risk is. By doing so, you can focus your mitigation efforts and supply chain risk management strategies on the most important and impactful risks.
Risk scoring is a useful technique to gain visibility into which issues require the most attention.
Every risk that you document should be scored based on three aspects:
- Impact on the business if the risk materializes,
- The likelihood of the risk materializing,
- The business’s preparedness to deal with that specific risk.
To reflect a business’s risk appetite, tolerance thresholds are implemented based on the risk scores. Using a consistent scoring method to assess all risks and prioritize them according to importance is crucial. This approach helps to identify the most significant risk areas/products and nodes that are more susceptible to failure.
3. Prioritize Risks
Once all risks have been assessed, they should be prioritized based on their potential impact and likelihood. You can do this by establishing a 5-point scale similar to the following, and then assigning a number from this scale to each risk and impact identified:
- 1 – Negligible
- 2 – Marginal
- 3 – Significant
- 4 – Critical
- 5 – Crisis
By assigning a weight to each risk on a scale, you’ll be able to determine which supply chain risks to tackle first.
4. Develop Mitigation Strategies
A comprehensive supply chain risk management program requires more than just identifying and assessing risks. Mitigating the identified risks is crucial to avoid being caught off guard during a risk event. To achieve this, it’s essential to have a set of effective risk mitigation strategies in place.
There are four primary strategies for mitigating risk, each with its own purpose and benefits for different businesses.
- Risk Acceptance: This strategy involves accepting that a risk exists and acknowledging the potential consequences. This strategy may be appropriate when the possibility of reward outweighs the risk, the probability of the risk occurring is low, or the negative impact is minor.
- Risk Avoidance: Risk avoidance involves taking actions to completely avoid exposure to the risk and prevent it from happening. Businesses typically do this if a risk is too significant to accept.
- Risk Reduction: This is the most common risk management strategy businesses use. This strategy involves taking steps to minimize the likelihood of a risk occurring or to reduce its impact.
- Risk Transfer: Lastly, businesses can hand off risk to a willing third party if they identify a risk that they cannot prevent. For example, a business may pay an insurance company to cover certain risks or include risk transference clauses in contracts with suppliers or outsourcing partners.
5. Implement and Monitor Effectiveness
Having identified and assessed risks and developed effective risk mitigation strategies, it’s now time to implement and monitor the effectiveness of these strategies. This step is crucial as risks are always evolving and changing, and businesses need to continuously adapt to keep up.
Regularly checking each risk’s impact level and mitigation strategy during weekly meetings or daily stand-ups can help catch any changes or emerging risks.
Additionally, reporting on risks, best practices, and mitigation approaches can help make the risk mitigation strategy even more effective. Keeping risks at the forefront of stakeholders’ minds is important for informed decision-making, and regular reporting can surface new risks that hadn’t been identified yet.
Techniques for Mitigating Risks in Supply Chain
Diversify Your Supplier Base
One key way to mitigate risk is to diversify suppliers by sourcing materials from various entities. Relying on a single supplier can increase risks and any issues with that supplier can disrupt your entire supply chain.
By engaging multiple suppliers, you can spread risks and reduce the impact of potential disruptions. A broader supply network can also increase your supply chain resilience. Whether you have a global supply chain or a relatively limited production flow, working with suppliers in different locations can reduce the risk of localized issues.
Furthermore, working with different suppliers enables you to select those with specialized expertise and find products or services of the highest quality and best price.
Leverage the PPRR Risk Management Model
A successful supply chain risk management strategy involves both preventing risks and mitigating their impact. A business continuity plan is essential for protecting an organization’s ability to maintain operations during a supply chain disruption.
To achieve this, a thorough risk assessment is necessary. By identifying different risk factors, businesses can create a list of potential failure points in the supply chain and develop plans for risk mitigation.
One useful approach is the PPRR model:
- Prevention – Taking measures to reduce or eliminate risk exposure in the supply chain.
- Preparedness – The measures taken to establish appropriate and time-sensitive responses.
- Response – To control, limit, and minimize the immediate and long-term impact of a supply chain disruption.
- Recovery – Taking swift and safe actions to overcome supply chain disruptions.
Optimizing Your Inventory Management & Demand Planning
Another way to increase your resilience and mitigate risks is to consider modifying your strategy for inventory planning and management. Many manufacturers, distributors, and retailers are facing challenges in determining the appropriate amount of inventory to hold due to recent supply chain disruptions.
The just-in-time (JIT) inventory approach, which has been widely adopted by product-based companies over the past few years, is worth implementing. This approach involves stocking only the materials and products that are expected to sell (i.e. there is demand for these), rather than storing inventory in anticipation of future demand.
Order quantities have a significant impact on inventory levels. Inaccurate demand forecasting can lead to costly issues for companies, such as having too much or not enough product in stock.
The former can occur due to a miscalculation of demand or a decrease in sales, while the latter can happen when sales are high but the supply is lagging. Companies miss out on revenue opportunities in both of these scenarios.
So, to determine ideal inventory levels and forecast inventory needs, businesses can utilize the economic order quantity (EOQ) models. These models take into account the costs of ordering, holding, and stockouts.
Ensure Your Business is Insured with Reliable Cover
The modern supply chain faces numerous logistical challenges and disruptions. Due to the complex relationships between vendors, suppliers, and customers, a disruption in one part of the supply chain can have a significant impact on other areas. Fortunately, insurance coverage may provide a solution to mitigate these disruptions and help ease the resulting losses.
Unlike conventional insurance policies, supply chain insurance is designed to provide peace of mind over a business’s supply chain and financial protection in case of disruptions.
Two types of insurance that cover supply chain issues are contingent business interruption (CBI) insurance and broad, specialized supply chain insurance.
CBI insurance can cover disruptions in the supply chain caused by significant partners, suppliers, or customers. But, it will not protect you from losses due to political or transportation disruptions or bankruptcy of partners or suppliers.
On the other hand, specialized supply chain insurance is a more comprehensive policy that can cover a wide range of risks and exposures. These include natural disasters, production issues, and employment and labor issues.
While insurance should not be the main feature of your supply chain risk management strategy, it can serve as a safety net when other control measures fail.
Another key technique for ensuring business continuity and mitigating risks is through a redundancy plan. By having backup resources in place, such as multiple suppliers or extra inventory, companies can quickly reconfigure and recover during a crisis.
But while building redundancies can increase the resilience of the supply chain, it can also come at a cost. Redundant stock, capacity, and workers can be expensive, and too much redundancy can reduce efficiency and increase costs.
So, much like with other mitigation techniques, businesses must determine the optimal level of redundancies to strike a balance between risk mitigation and cost-effectiveness.
Establish Collaborative Supplier Relationships
Finally, treating suppliers like true business partners can help businesses build stronger and more resilient supply chains. It’s important to approach the relationship as a partnership, with a shared focus on finding solutions to challenges and developing common goals.
When selecting suppliers, look beyond the standard criteria of expertise, pricing, and timeliness, and instead look for partners who share similar values and principles. Agreements on issues such as environmental sustainability and social responsibility are particularly vital.
As digitization continues to transform manufacturing processes and automate operations, supply chain technology is evolving rapidly.
With the increasing complexity of products, global operations, and higher customer expectations, going digital is becoming essential to streamline SCM and enhance the resilience of supply chain operations.
Adopting innovative technologies can give your company the competitive advantage it needs to stand out in the industry and meet the evolving demands of your customers.
Here are some of the latest technological innovations that are changing the way supply chains are operated and managed:
The global exchange of goods can often result in a lack of transparency. The need for secure transactions and transparency in environmental, social, and governance (ESG) standards are driving how buyers relate to brands.
Blockchain technology has the potential to revolutionize the supply chain industry by offering increased traceability and security. While commonly associated with cryptocurrencies, blockchain technology can also assist companies in monitoring financial transactions, tracking products, and managing contracts.
This secure and transparent tracking of products not only gives peace of mind but also reduces the risk of fraud and errors in the supply chain.
Artificial Intelligence (AI) and Machine Learning (ML)
From automating processes and cutting costs to boosting operational efficiency, artificial intelligence (AI) and machine learning (ML) are quickly becoming essential tech tools for companies and their supply chains. Supply chain leaders can make quick, data-driven decisions with AI and ML solutions.
AI is a broad term that encompasses making basic inferences, storing data, and learning from it. On the other hand, ML is a subset of AI that enables unsupervised machines to learn from data without constant human oversight.
AI technology can streamline a range of supply chain processes, such as warehouse management and invoice processing, leading to increased efficiency and cost savings.
Internet of Things (IoT)
The Internet of Things (IoT) technology is also integral to supply chain risk management in the modern world. By using IoT-powered software, information about remote objects can be efficiently collected. This not only aids in providing operational visibility but also the ability to perform analytics on real-time data.
How it works is that it allows for data exchange within and between systems over the internet and provides actionable data from every step of the supply chain.
By fitting your trucks, machinery, warehouses, and other assets with smart sensors, you can always keep an eye on them and notice whenever the risk of an issue arises.
Best Practices for Supply Chain Risk Management
Know Your Business Partners
While some risks are beyond a company’s control, the supply chain is a network of business relationships that organizations can manage by selecting reliable and trustworthy suppliers. It may seem obvious, but knowing who your business partners are and whether they pose any threats to the supply chain is crucial.
With diverse and complex supplier arrangements, transparency up and down the chain is essential. As a business, you should question the reliability and reputability of your suppliers, whether their location or operations poses any supply chain risks, and whether they reflect well on your company.
These are vital things to consider as many consumers don’t differentiate between a brand and its suppliers. Negative publicity resulting from a supplier violating sanctions or using unethical labor practices can cause significant harm to a brand’s reputation.
Foster a Risk-Aware Culture
Supply chain risk management can be greatly facilitated when it’s approached as a team effort. By fostering a risk-aware culture, you can ensure that all individuals and stakeholders involved support the highest standards of risk management. This can help reduce the likelihood of disruption.
To achieve this, you can utilize training materials to educate your employees about supply chain risks and encourage them to comply with risk management policies. You can also promote open communication and set clear expectations and benchmarks to ensure that your entire supply chain aligns with your mitigation strategies.
By openly discussing risks and demonstrating the importance of implementing better management systems, you can make supply chain risk management a top priority. The more your employees and partners are informed about risk identification and mitigation, the more prepared they’ll be to handle potential issues.
Strive for End-to-End Supply Chain Visibility
In today’s complex business landscape, supply chains are comprised of multiple stages and each stage poses its own set of risks and challenges. In such a scenario, it’s crucial to have complete end-to-end visibility of the supply chain to manage risks effectively.
Constant communication and timely, accurate information about inventory and potential issues at each stage can help prevent disruptions, delays, or imperfections in final products or services.
Transparency means having a clear understanding of where your inventory is at any given point in the supply chain. As well as being able to anticipate potential risks and mitigate them proactively.
Real-time data sharing across the supply chain provides a comprehensive overview of the entire process, along with detailed information about each step. This level of visibility not only helps businesses but also benefits customers through real-time tracking of deliveries.
Consistently Monitor Risks & Conduct Regular Risk Assessments
Conducting a single risk assessment is insufficient for effective supply chain risk management. You need to keep your risk management strategies up-to-date and relevant to your supply chain operations.
It’s essential to dedicate enough time to consistently monitor and assess the possible outcomes for each risk and develop contingency plans. By asking “What if?” and preparing for possible scenarios, businesses can be better prepared to take action quickly if a crisis arises.
A supply chain risk review should be conducted at least once a year or whenever you make changes to your supply chain and production flow. For example, if you modify your manufacturing processes or begin working with a new supplier, you’ll need to assess any new risks that may arise.
With the increasing complexity of supply chains, it only takes a small misstep or issue for something to be disrupted. Whether it’s an unforeseen external factor, such as a pandemic, natural disaster, or a chain of internal errors that lead to a problem, supply chain failures can have lasting effects.
The case studies below further underscore the importance of supply chain risk management and what can be learned from the handling of these supply chain issues:
1. 2011 Japan Earthquake and Tsunami on Toyota’s Supply Chain
Toyota, a leading automobile manufacturer, is a founder of the ‘lean’ principle in supply chain management. However, while proficient and profitable, Toyota’s reliance on a ‘just-in-time’ delivery network of reliable suppliers made it incredibly vulnerable to disruptions when the 2011 Japan earthquake and tsunami hit.
The disaster caused widespread damage to the region’s infrastructure and disrupted Toyota’s supply chain, leading to a shortage of parts that lasted for weeks. As a result, the company lost 75% of its profits in just a few hours. Toyota’s supply chain management strategy, which relied on a single supplier, was exposed as a major weakness.
To prevent such a disruption from happening again in the future, Toyota has since implemented a 60/20/20 supply model. This model distributes spend between several suppliers to spread risk. It also developed its RESCUE system to protect Japanese manufacturing.
2. Nike’s 1991 Sweatshop Scandal
Nike’s early 1990s sweatshop scandal marked a turning point for corporate social responsibility practices. In 1991, investigative journalist and activist Jeff Ballinger published a report revealing appalling practices taking place in Nike’s Indonesian factors, including child labor and hazardous working conditions.
The company initially denied any knowledge or responsibility for these practices, which led to an undercover documentary further exposing the situation.
Nike’s reputation suffered a major blow, and sales dropped as the media portrayed the company as willing to exploit workers to expand profits. The scandal forced Nike to overhaul its supply chain oversight efforts, including enhancing monitoring protocols, raising the minimum age requirement for workers, and increasing factory inspections.
The impact of the Nike scandal was significant, but it occurred before consumers were readily learning about and connecting with brands on social media.Today, the stakes are higher, with consumers demanding transparency about how and where products are made.
3. The 2013 Horse Meat Scandal in Europe
The 2013 horse meat scandal, also known as ‘Horsegate’, shook the food industry and put the vulnerability of supply chains into the spotlight. This scandal involved foods that were advertised as containing beef but were found to contain horse meat, sometimes up to 100% of the meat content, which was not declared.
The scandal not only highlighted a major breakdown in the traceability of the food supply chain, but it also posed a potential risk to public health. The damage to the industry and the fear of customers encouraged businesses to take more responsibility for their supply chains and adopt more rigorous quality control measures.
Ten years on from the scandal, it serves as a reminder of the importance of transparency, traceability, and quality control in a supply chain. This scandal showed that although unethical practices can infiltrate supply chains, businesses can still take action to prevent such incidents from happening again.
What are the types of risks in supply chain management?
Supply chain management involves many moving parts and different processes, exposing it to numerous types of risks. Companies may encounter both internal and external risks. Internal risks include business, manufacturing, contingency, financial, and planning risks. On the other hand, external risks include demand, environmental, sociopolitical, and supply risks, to name a few.
What are the impacts of risks in supply chain management?
The impacts of supply chain risks can be significant, ranging from financial losses to reputational damage. Some examples of the impact of risks in supply chain management include:
- Material shortages – which can impact the manufacturing of a product.
- Price fluctuations – changes in supply or demand can threaten a business’s financial profitability.
- Delayed shipments – which can lead to missed deadlines and dissatisfied customers.
- Supply shocks – Global or industry-wide disruptions such as a natural disaster or pandemic can decrease the supply of goods dramatically.
- Negative supplier relationships – when a disagreement arises between supplier and a business, it could lead to delivery delays or financial losses.
Having covered everything in the above, it’s incredibly clear to see how crucial supply chain risk management is for running a successful business in today’s world. The range of risks that business’ face are wide and varied, from sociopolitical and environmental risks to internal financial and operational risks.
To effectively manage supply chain risk, it’s important to take a comprehensive approach that involves identifying, assessing, prioritizing, and mitigating risks. While some risks are out of our control, businesses can take smart steps to prepare for unexpected and potential disruptions.
Looking to the future, supply chain risk management will become even more critical as businesses face increased uncertainty and complexity. Adopting new technologies, aiming for complete end-to-end supply chain visibility, and consistently keeping a finger on the pulse of risks are just a few ways businesses can enhance resilience.