Why you need supply chain risk management (and how to do it)
Today, companies rely on supply chains to create and deliver their products and services. The problem with chains is that if one link breaks, the whole chain falls apart. But supply chain efficiency indicators like lead time, on-time delivery and inventory level can improve dramatically for any business that successfully manages its supply chain risk.
Business supply chains often include producers, vendors, warehouses, transportation companies and distribution centers.
Everything from climate change to pandemics to the multipolar economic system can disrupt this chain.
Such disruptions hurt businesses and can cost a company millions of dollars, loss of reputation, etc. That’s why every business needs a supply chain risk management plan to reduce and overcome these kinds of risks.
What is supply chain risk management (SCRM)?
Supply chain risk management is the process of reducing the risk that a single link in your chain could break. It also entails making a plan for alternative sources of goods and services in case one supplier is unable to fulfill their duties for any reason.
The COVID-19 crisis has made SCRM’s importance clear to every business around the world.
It disrupted the supply chain for many businesses and brands — including Fortune 500 ones like Apple. China is a huge global supplier and when the COVID crisis began, Chinese factories closed for a period of time. That disrupted the supply of materials, parts and finished products to businesses around the world.
As a result, those businesses were unable to deliver on the promises they’d made to customers.
Supply chain risk management helps businesses reduce or eliminate all kinds of supply chain vulnerabilities. If done properly, it can improve your company’s ability to operate continuously and profitably with minimal disruption.
How to lessen your company’s supply chain risk
You need to understand the steps of the risk management cycle to effectively reduce supply bottlenecks, solidify supplier relationships and ensure that your company runs efficiently.
1. Identify the risk
Risk identification is the first step in the risk management cycle. So, first of all, you have to figure out the kinds of risks most likely to affect your supply chain and create a risk profile. Then, you need to keep it up to date by actively monitoring these risk profiles.
The goal is to predict risks related to your supply chain and estimate their impact on your sales, purchasing volume and reputation.
It will be useful if you use clusters by topic to classify your risks like:
- Chances of disruption for each supplier
- Economic stability of the companies
- Logistical weaknesses that could cause interruptions
- Geopolitical conditions that could impact production
You have to imagine all the possible ways your suppliers could be slowed or shut down, causing production or delivery problems for you.
2. Assess how likely it is
Risk assessment is the second critical step of the supply chain risk management program.
In this phase, you need to understand how each risk event you’ve identified could affect your business. You must be particularly aware of those suppliers or partners who have a big impact on your business, sales and profit. These are the ones to be most concerned about.
To ensure that you have a proper understanding of each risk’s impact on your business, you can follow these steps:
- First of all, you should create a complete list of all your suppliers, along with risk elements like locations, ports, local shortages etc.
- Then you need to figure out the key parameters to evaluate them.
- Finally, create a general risk evaluation.
While all risks are worthy of attention, a big supplier with multiple risk factors should be of greatest concern to you.
3. Take steps to reduce the risk
Mitigation, or supplier risk management, is the third and final phase of the risk management cycle. In this phase, you need to build action plans. Here, you will prepare your business to solve for each risk.
You can define your action plan in two parts:
Preventive action plans
This part is about listing actions you can take to prevent the supply chain disruptions you identified in Step No. 1.
For example, if all of your materials come from one supplier, you might consider adding a second supplier. That way, if your main supplier is unable to meet its commitments, you still have a reliable source and can keep your business operating.
This is the action plan that will help you know what to do if the supply chain gets disrupted despite your best efforts.
Many, many business owners wish they’d had this plan ready when COVID-19 took the world by storm.
Types of risk
It’s easy to think of supply chain risk in terms of undelivered materials or components but there are different types of risks you need to manage. For example:
Your supply chain could be disrupted by a financial crisis. For example, your supplier’s unexpected bankruptcy announcement could bring your business temporarily to a halt. That’s why you need to keep an eye on their financial health and history.
Risk to your reputation
The involvement of your supplier in illegal activity can hurt your business reputation. A supplier who uses unethical practices to produce their goods could damage your reputation if it becomes known they endanger their employees.
Natural disaster risk
Natural disasters like hurricanes, earthquakes and COVID-19 can impact your supply chain by temporarily halting production in supplier facilities.
Man-made risks like explosions, strikes and fires can disrupt your supply chain without warning.
Your supply chain could be impacted by a political event like Brexit, India-China LAC tension, etc.
There is always a possibility your suppliers’ use of technology will hurt your business, as in a case where their poor digital security practices lead to a breach of your critical business systems.
Benefits of supply chain risk management
A good supply chain risk management plan can help a business foresee and overcome all kinds of risks so that it can run smoothly. Here are some top benefits of SCRM:
Regular supply chain reviews increase the efficiency of a business and reduce the chances of things going wrong. Changes you make as a result of these reviews can actually help your business keep running during a risk event.
Related: Business continuity planning
Supply chain visibility
Once you understand the actual risks you face, you can focus suppliers’ attention on heading off likely problems before they become critical.
You can properly monitor and report standards compliance in every part of your supply chain.
Supplier risk management
You can effectively manage suppliers and understand their value while also reducing your risk.
Pay attention to supplier risk management
An effective supply chain risk management program is very useful for every business no matter where in the world they are. It is a must-use system for all businesses to survive during the COVID-19 crisis.
To take complete advantage of SCRM, you need to understand and figure out all three phases of SCRM (Identification, Assess, and Mitigate) for your business.
The latest technology like AI, machine learning tools and software has made it easier to implement SCRM for any type or size of business. Using the right technology and tools, every business can use SCRM to become more efficient and keep operating in times of uncertainty.