A business is unable to fulfill its obligations to customers without a functioning supply chain, and not all supply chain risk is within the control of the business. It is necessary to understand supply chain risk in order to manage it. however, so in order to achieve successful management of supply chain risk, it is first necessary to understand what exactly constitutes this type of risk.
Supply Chain Risk
Supply chain risk is the potential impact of supply and demand being mismatched. In other words, the supply chain exists to match supply to demand, and supply chain risk refers to elements that have the potential to disrupt that flow of resources. Supply chain risks can be divided into two categories:
External Supply Chain Risk
External supply chain risk can potentially impact the supply chain from outside of a business. While some of these risks are outside the sphere of influence of the business, some are not. They can all have a significant impact on the supply chain and need to be taken into consideration during the risk management processes. External supply chain risks can include:
Environmental risk caused by environmental, political, governmental, or socio-economic conditions.
Supply risk caused by disruption to the delivery of raw materials to the business.
Business risks caused by the sale or purchase of a company within the supply chain.
Demand risks caused by unexpected shifts in product demand or a lack of accuracy in product demand calculations and market projections.
Internal Supply Chain Risk
Internal supply chain risks emanate from within the business which are within the business' control. This type of risk is highly disruptive but easier to plan for. Internal supply chain risks can include:
Once supply chain risks have been categorized as either external or internal in nature, it is important to review how these categories relate to the risk appetite and risk tolerance of the business. With all these parameters clearly defined in terms of the business in question, and in alignment with the needs and objectives of the enterprise, a comprehensive Supply Chain Management strategy can be developed.
Supply Chain Risk Management Strategy
Modern businesses face a risk landscape that is constantly shifting and evolving – not least as a result of rapid technological advancement. For this reason, the ‘PPRR Risk Management’ model has become a widely adopted approach for global enterprises seeking a comprehensive yet flexible way to deal with risk in the commercial environment. This model promotes a Risk Management framework based on the following four points:
- Prevention – The mitigation of risk through preventative steps.
- Preparedness – The development of contingency planning.
- Response – The execution of contingency planning during a risk incident.
- Recovery – The swift return to operations.
Using this framework as a broad guide, it is then possible to develop a Supply Chain Risk Management strategy that is specifically tailored to the needs and objectives of the business. With bespoke elements considered, there are common areas that should be covered to ensure successful Supply Chain Risk Management, however.
Increase Supply Chain Visibility
There are two aspects to Supply Chain Visibility (SCV). Firstly, there is the tracking of goods or resources for the purpose of accurately controlling inventory. Secondly, there is the level of knowledge, data and understanding of suppliers within the supply chain. Both aspects should be increased for successful Supply Chain Risk Management. A clearer view of inventory location, as well as transit time and distance aids supply chain planning, both in terms of normal operation and contingency situations. This helps to safeguard the integrity of the supply chain. It is important to apply that same visibility to the suppliers themselves for the same safeguarding purpose because changes to the operational circumstances of suppliers can also impact the supply chain.
Increase internal risk awareness
For a Supply Chain Risk Management strategy to be truly successful, it is imperative that the business workforce is fully trained in risk awareness and risk mitigation techniques. This ensures that Risk Management is at the heart of all processes throughout the enterprise. The purpose of increasing internal risk awareness is to create a culture of effective Risk Management within the business overall. This requires the delivery of comprehensive training focused on Risk Management best practice, as well as specific risk mitigation needs tailored to the business in question.
While the idea of data centralization may conjure security concerns, it is in fact the case that streamlining the storage of information is a significant aid to Risk Management in business. This is because a scattered approach to data storage creates its own risks, including the loss of information and delays to processes including sales, procurement, and accounting. When combined with a stringent approach to cybersecurity, the centralization of data reduces the number and range of risks facing the business, by increasing visibility and accountability, as well as providing more opportunity for automation of basic administrative processes. Automation aids risk mitigation by reducing dependence on human input to systems while also increasing efficiency through the same means.
Increase cyber security
It is always best practice to work on increasing the cybersecurity around any business, but this is also an essential component of successful Supply Chain Risk Management. The centralization of data that forms the basis of Supply Chain Risk Management dictates that cybersecurity must be of the highest priority. This is because centralization creates a number of specific risks that must be addressed, including:
The adoption of cloud technology provides an advantage in terms of increasing cybersecurity as it brings with it additional layers of security, easier centralization, convenient but secure remote access, and the reassurance of off-site backups. In this way, cloud technology can form the basis of a comprehensive Disaster Recovery Plan, Business Continuity Plan, and Logistics Contingency Plan.
Build Logistics Contingency Plans-Logistics Contingency Planning is an important part of Business Continuity Planning and specifically addresses supply chain actions in the event of disruption. Key to creating Logistics Contingency Plans is the comprehensive assessment of all parties in the supply chain. Each supplier should be subject to a thorough risk assessment tailored to the needs of the business, and then categorized and graded accordingly. The Logistics Planning, capacity and capability of each supplier is a central consideration in each risk assessment. In addition, alternative suppliers should be sourced and selected, in order to maintain a range of options when disruptive events occur. Logistics Contingency Plans should also make explicit the roles and responsibilities to be enacted and followed in emergency situations, so that decision-making is neither delayed nor confused, and communication channels are made clear. Any Logistics Contingency Plan should be continually reviewed and updated in response to both global and local circumstances.
- Increase supply chain resilience- All Supply Chain Risk Management steps build toward supply chain resilience – that is, the capacity of a supply chain to resist and recover from disruption. These include the use of cloud technology and the sourcing of multiple, alternative suppliers. There are some additional techniques, specifically geared toward resilience, that can be implemented, however:
- Local suppliers – Paying close attention to the location of suppliers can help to ensure supply chain resilience because local suppliers will be better able to fulfil obligations in less time than those further away.
- Plan for capacity fluctuations – Where possible, businesses should build buffer capacity into the inventory. This enables the business to stockpile supplies ahead of, and during, periods of increased risk.
- Stress test – A Supply Chain Risk Management strategy is only as good as its most recent stress test reveals it to be. Stress tests should be completed regularly, with the results reviewed quickly and issues addressed.
- Monitor and review- As with all business processes, any Supply Chain Risk Management strategy should be constantly monitored and reviewed, and opportunities for improvement and the learning of lessons seized upon immediately.