Increased risk in the supply chain is driven by the growth of global trade and the increasing attempts to improve efficiency. The necessity for businesses to procure, manufacture and supply in low-cost areas of the world whilst also meeting customer expectations of sustainability and responsible business practices means that supply chain risks are on the rise. Recent research shows that 70% of businesses experienced at least one supply chain disruption last year.
Although risk is normally understood to mean something negative, that isn’t always the case. As Cerasis point out, a sudden increased demand for a product is still a risk, for example. If demand can’t be met, the company risks losing customers and brand reputation.
Companies that implement supply chain risk management strategies stand to gain an improved bottom line, and can provide better customer service. This post highlights four categories of supply chain risks, and potential strategies for management.
What is supply chain risk, anyway?
Deloitte identifies four categories of risks that procurement professionals need to be aware of.
Macro environment risks
This category centres around broad forces that affect the business as a whole. For example, globalisation and the access to cheap labour and materials. Whilst this is an opportunity to enter new markets, it also increases supply chain complexity and the potential for geographically-related incidents (like natural disasters and regional economic crises).
Extended value chain risks
These risks entail a company’s supply chain partners – other companies that a business might use for outsourcing, for example. The increased use of outsourcing across supply chains has again increased complexity and therefore the chance of disruptions.
These types of risks encompass product development, manufacturing and distribution. The drive to boost supply chain efficiency and agility has minimised the room for error that companies can afford to make. So, if there are any supply chain disruptions, they are amplified.
The final category Deloitte identify relates to internal business functional such as Finance, Human Resources, Legal and IT. Any breaches or disruptions within these functions pose a risk to supply chain activities.
OK – so how do I start managing supply chain risk?
Before you start planning your supply chain risk mitigation strategy, remember that it’s impossible to avoid risk entirely. Risk is simply part of the supply chain operation – trying to prevent it from happening altogether is unrealistic.
However, that isn’t to say that you can’t take steps to minimise the risk and also put in place contingency measures to soften the impact of possible disruptions. This is known as resiliency.
Resilience is the ability of a global supply chain to reorganize and deliver its core function continually, despite the impact of external and or internal shocks to the system. – World Economic Forum
A quick Google search will bring up hundreds of results about the best way to build a resilient supply chain. There might be a few differences between them, but the key strategies remain the same:
1. Identify specific risks through collaboration
Before you start planning risk mitigation, you need to identify weak points in your supply chain. So, work with your suppliers to understand two things. Firstly, what is the significance of the risks they bring? Secondly, how can you offset them, and what processes has the supplier put in place to mitigate risks?
Collaboration can take place at multiple stages in your partnership with suppliers as well as supply chain partners. Supply Chain Digital highlight the benefit of being open from the outset: setting expectations and encouraging dialogue with your suppliers builds trust and confidence on both sides. Taking a joint approach to risk drives better outcomes if things go wrong.
Although you’ll never know exactly when an incident will take place, you can be sure that it will happen at some point. After you’ve identified the risks most likely to compromise the supply chain, form contingency plans.
These contingency plans could be anything from identifying and partnering with backup suppliers, to having alternate methods of transportation in place. Most importantly, your plans need to be flexible so you’re able to respond rapidly to unpredictable changes in demand or supply.
3. Analyse, monitor and evolve
The final step to building a resilient supply chain is evaluation and amendment. Building resilience in the supply chain is an ongoing process. Your response to how things go wrong keeps it evolving and progressing. When things go wrong, it’s important to monitor how effective your mitigation approaches were, and apply what you learn to future strategies.
Ultimately, when an event disrupts business, your supply chain must be able to adjust and respond accordingly. Having a resilience strategy in place improves your chances of overcoming the associated challenges of disruption.