Supply chain risks can cause significant disruptions to a business. Managing these risks is essential for a company’s success. There are several ways to manage supply chain risks, and each company will have its approach. The best way to manage these risks depends on the type of business and the products or services it provides. Several factors to consider when managing supply chain risks, including supplier stability, inventory management, and contingency planning. By considering all of these factors, a company can create a plan that minimizes the risk of supply chain disruptions.
In business, there are always risks. But, managing those risks is especially critical when it comes to the supply chain. Here are four strategies to assist.
1) Identify your key suppliers and what would happen if they were no longer available.
2) Evaluate your options for backup supplies and delivery routes.
3) Develop a plan for dealing with big and small disruptions.
4) Communicate with your team and stakeholders about the plan and how everyone can help keep things on track. Having a solid risk management plan in place can help ensure that your supply chain stays safe and reliable – no matter what comes your way.
Why is Supply Chain Risk Management Important?
- Supply chain risk management is essential because it helps identify potential disruptions and vulnerabilities in the supply chain to implement contingency plans.
- By anticipating potential disruptions, businesses can reduce the impact that disruption may have on their business.
- Disruptions in the supply chain can have a ripple effect throughout the entire business, so it is essential to have a plan to deal with them.
- Supply chain risk management is an ongoing process, and businesses should continually reassess their supply chain to ensure that it is as resilient as possible.
Key elements of supply chain risk management include:
- Monitoring supplier performance and assessing supplier risk
- Establishing contingency plans for potential disruptions
- Building solid relationships with key suppliers and collaborating with them to manage risk
- Having a robust communication plan in place in case of an emergency
What are the Main Risks Facing a Supply Chain?
- Shortages and disruptions in the supply of raw materials.
- Inability to forecast consumer demand accurately, leading to stockouts or overstocking.
- Inefficient transportation and logistics systems cause delays and increase costs.
- Employee theft or sabotage of company assets.
- Natural disasters damage factories or disrupt shipping routes.
What are the Key Issues of Supply Chain Management?
- Managing the flow of materials through the supply chain from supplier to customer.
- Planning and forecasting demand.
- Tracking inventory levels and ensuring enough stock on hand to meet customer demand.
- Optimizing the sourcing and procurement of materials
- Ensuring that goods are delivered on time and in perfect condition to meet customer expectations.
- Developing systems and processes to manage the supply chain effectively.
How Do you Mitigate Risk in the Supply Chain?
- Establish clearly-defined supplier requirements and expectations, and ensure that these are communicated effectively to suppliers.
- Periodically audit suppliers against these requirements, using various methods such as on-site visits, review of documentation, and interviews with personnel.
- Take action against suppliers who do not meet the required standards, up to and including termination of the business relationship.
- Continuously monitor supplier performance to identify any changes in quality or compliance that could impact the supply chain.
- Use a qualified third party to conduct audits and manage supplier relationships whenever possible.
- Require suppliers to have insurance and indemnification agreements in place
- Prepare a crisis management plan for potential disruptions in the supply chain.
How Do you do a Supply Chain Risk Assessment?
The process of supply chain risk assessment is like any other business unit’s framework in that it follows the same steps. The only difference between these two processes lies within their policies and procedures; It determines how risks are assessed for each type or sector within your organization.
Supply chain management is a complex system of relationships and resources that requires careful planning to ensure consumers’ security, integrity, and availability.
A risk assessment should be conducted to identify vulnerabilities and potential disruptors within this delicate web-like structure. The first step towards conducting successful SCRAs (Supply Chain Risk Assessments) includes understanding your current position through mapping out all major suppliers/vendor networks. Along with their associated strengths & weaknesses; then analyze how those factors may change over time based on seasonal demand patterns or new regulations.
Define the organization’s products and services
An organization needs to define its products and services to inform risk assessment exercises. It could include the product price, eligibility for refunds or exchanges, store policies like a return or refund dates, and other essential information that will ensure a smooth purchasing experience for customers.
The products and services need to be categorized into critical, essential, and non-essential. In this step, the business identifies its key suppliers and associated vulnerabilities. In some cases, it may make sense to develop supplier category-based policies for managing risk across multiple locations.
Identify potential points of supply interruption for each product or service
After defining the products and services, the next step is to identify potential supply interruptions in key suppliers. A potential supply interruption can be defined as a situation where the flow of material to the company is interrupted.
For example, if you were producing clothing and identified that most of your fabric is supplied by one supplier who has closed his/her business, this would be a significant source of supply interruption for your business.
Assess the potential severity of an interruption at each point of supply
The identified points of disruption will be assessed against the potential severity of the disruption. The severity could have been in the various levels of significant or catastrophic. It can also depend on the operating risk appetite. The following descriptions can be used as a guide to determine the severity of the interruption.
A simple method to identify if an interruption is severe enough would be whether it has caused significant loss of life, safety, property damage, and business disruption.
In assessing this risk, it is important to consider that organizations may have multiple supply points with an ample supply and the other small. In this case, the impact on business or organization can be minimized by drawing alternate supplies from different points to avoid a single point of failure.
Develop a mitigation strategy for each potential point of supply interruption
The key risks from the assessment will be subjected to improvement actions/mitigations. The mitigation strategy can combine technical, organizational, and behavioral measures.
Technical measures can include:
- Deployment of multiple sources of supply/replenishment routes
- Storage and diversification (including geographical); and
- Buffer stock management.
Organizational measures may include:
- Procurement contracts with suppliers which allow for flexibility, e.g., quantity, timing, price;
- Logistics and transport management.
Behavioral measures may include:
- Changing behavior within a company to reduce the impact of a point of supply interruption (e.g., loss in revenue) or increase its ability to recover from a disruption, e.g., stock turnover will increase;
- Enhancing critical skills (e.g., lean manufacturing, agile manufacturing) to reduce the impact of a point of supply interruption; or
- Changing behavior within society that can affect the ability of companies to recover after a disruption (e.g., encouraging sustainable packaging).
Ways to Manage Supply Chain Risks
Identify your key suppliers and what would happen if they were no longer available.
Identification of key suppliers should be part of your competitive advantage.
Short term fix: Develop a plan to deal with the supplier in a short time frame (days or weeks)
Medium-term fix: Develop a plan to deal with the supplier in a medium time frame (weeks or months).
The long-term fix: Develop a strategy for when you will no longer need the services of your key suppliers.
Evaluate your options for backup supplies and delivery routes.
An organization needs to evaluate options for backup supplies and delivery routes. It is one of the first steps that an organization should take to develop a plan for business continuity.
Options may include:
- Buying supplies and equipment from another location
- Leasing additional equipment
- Forming alliances with other organizations.
The alternatives depend on the nature and size of the organization the availability of resources in the disaster area.
A company that provides services to home health care agencies might establish an agreement with a local hospital to use its premises as an emergency facility if their building is destroyed, for example. A zoo could consider the location of other zoos location when they need to receive animals made homeless by a catastrophe.
Delivery routes may also need to be evaluated and reassessed. A company that regularly supplies food for schools may learn that some of the schools they usually provide were hit by a disaster and will need emergency deliveries. That company might look at finding new routes or sources of delivery, depending on the situation.
Develop a plan for dealing with disruptions, both big and small.
After evaluating plans, there is a need to create an organizational-wide plan for dealing with big and small disruptions. These plans should be regularly and rigorously tested and updated
A realistic plan will work best with all employees, not just the executives and managers. It is essential to have everyone involved in testing the plan as some more critical people. Also, those at ground level can provide a unique perspective on implementing the plan best.
Additionally, this practice will help to ensure that all employees are familiar with what they should do in the case of an emergency. “A more thorough testing process also ensures that the entire workforce is prepared for any event.”Be completely transparent with customers and employees.
Communicate with your team and stakeholders about the plan and how everyone can help keep things on track
Team and stakeholders need to understand plans and keep everyone informed. Communicate the plan to the team and stakeholders
Keep everyone informed of progress against the plan
Update as necessary. Guide your team to help keep things on track and make suggestions if it isn’t going well. If you do not communicate with them, you could face a lack of motivation or engagement.
Employees will keep track of things if they understand how the plan works. Encourage employees to contribute their ideas and help you develop the plan. It will give them a sense of ownership and let them know that you value their opinion.
If progress is not going well, encourage your team to look at what went wrong and suggest ideas on fixing it. Encourage employees to be innovative with their ideas.
The plan should be updated when things don’t go to plan, or there are too many changes. Make sure that you communicate these to the team and stakeholders to know what has changed/is changing.
Risk management is a crucial component to running any successful business. However, it becomes even more critical when you are dealing with the supply chain as there can be many unknowns that could disrupt your company’s operation from occurring unexpectedly-which would result in lost revenue and time spent trying to restore order instead of making progress on other goals like growth or product innovation
Frequent disruptions are looming large over companies’ heads today due to both pressures created internally. Managers have been conditioned by previous incidents where something went wrong (they’re always looking back). External factors such as economic worries abroad; some may think they don’t need to bother with supply chain risk management.
I don’t think they are doing anything because the customer would not do business with them if they knew what was going on.” – supply chain executive, speaking about their client’s operations in China.
However, having a clear-cut plan on how you’ll deal with any issues involving the supply chain is better than not doing anything at all. You would be able to prevent disturbances in your business processes while offering superior customer service and protect yourself from possible legal action that could arise afterward should something go wrong because of neglect.
Chris Ekai is a Risk Management expert with over 10 years of experience in the field. He has a Master’s(MSc) degree in Risk Management from University of Portsmouth and is a CPA and Finance professional. He currently works as a Content Manager at Risk Publishing, writing about Enterprise Risk Management, Business Continuity Management and Project Management.