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What is Supply Chain Risk Management?

October 14, 2021
Average: 5 (2 votes)

Bird's eye view of freight containers

If you want to minimize recalls costing up to hundreds of millions of dollars, supply chain risk management is a good place to start. However, many organizations don't know the first steps to take, or even what it involves.

In this article, we'll clear all that up for you. You'll find it useful whether your industry is pharmaceuticals or electronics or consumer goods.

Introduction

You've probably already got a decent idea of what supply chain management (SCM) is: the management of the flow of goods and services, largely via streamlining of supply-side activities. It includes all the processes that convert your raw materials to your end products, including but not limited to procurement, sourcing, and logistics.

Supply chain management tools and solutions help to ensure that products are efficiently delivered from your suppliers to your customers. However, there is no one-size-fits-all approach to this: every single organization will face different challenges, and solutions need to be tailored to each one.

Supply chain risk management (SCRM), on the other hand, can be considered a sub-process of SCM. It identifies, assesses, and mitigates the various risks of your supply chain.

This is crucial, since every organization, regardless of industry, will be exposed to both external and internal risks from disturbance of their supply chain. Many businesses are rocked by unforeseen disruptions and vulnerabilities. Furthermore, many have scrambled to contain cybersecurity breaches and ended up losing vital intellectual property due to limitations or failures in the supplier side.

Implementing a supply chain risk management plan can help your business reduce costs, improve customer service, and operate more smoothly. This may involve tools, predictive analytics or other solutions.

External vs Internal Supply Chain Risks

External risks may include:

  • Natural disasters or incidents, such as earthquakes, pandemics, and hurricanes

  • Terrorism threats

  • Interruption of flow of products, including finished goods, raw materials and parts

  • Economic factors

  • Governmental factors

Internal risks may include:

  • Changes in key personnel

  • Changes in business processes

  • No contingency plans

  • Lack of proper cybersecurity controls and policies

  • Disruptions of internal operations

  • Lack of compliance with labor laws or environmental regulations

  • Failing to meet customers' needs

Known vs Unknown Risks

As the terms suggest, known risks can be identified, measured and managed, whereas unknown risks are very difficult or impossible to predict.

An example of a known risk would be a supplier bankruptcy, whose likelihood could be predicted based on the financial history of the supplier. Furthermore, the impact on your business could be estimated through consideration of the disrupted markets and products.

On the other hand, an example of an unknown risk would be one we have all become intimately familiar with: a pandemic. Even the most risk-conscious managers were not prepared for COVID-19.

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Working to increase the speed of your response to unknown risks when they occur is crucial to maintaining your competitive advantage.

We do encourage your business to:

  • Catalog a full scope of risks you might face

  • Create a risk management framework

  • Determine the metrics that are appropriate for managing your risks

  • Monitor and track these metrics

  • Identify gray areas where supply chain risks are difficult to define or understand

Why Do Businesses Struggle to Manage Supply Chain Risk?

There are many reasons why organizations might have a difficult time mitigating risks:

  • Severity and probability of many risks is hard to determine

  • Lack of supply-base transparency

  • Proprietary data restrictions – this limits visibility at the purchaser level

Steps to Supply Chain Risk Mitigation

These will in general apply to known risks.

1. Identify Risks

Identification of relevant risks should be comprehensive and focus not only on the supplier, but also on the supplier's service or production location.

  • Assess the nodes of your supply chain: plants, suppliers, transport routes, and warehouses

  • Enter risks on a register and track them. Parts of the supply chain where no data is available should be recorded

  • It is important to achieve suitable transparency from the direct supplier with regard to their critical supporting suppliers

2. Prioritize and Analyze Risks

  • Understand individual risk factors

  • Be aware of aggregations regarding single points of failure in the supply chain

  • Risks in your register should be scored on the following three dimensions: probability of risk, potential impact on organization, and the organization's preparedness

  • Create and utilize a consistent scoring methodology

3. Monitor Risks

A successful monitoring system will incorporate likelihood, preparedness, and impact. It will also be tailored to your organization's needs.

An early warning system to track risks is critical, as it will help limit or mitigate their impact. Digital supply chain risk management tools make this possible for even extremely complex chains.

4. Mitigate Risks

Your final step will be to set up a robust mechanism to review supply chain risks and determine actions of mitigation. This may include:

  • Additions to inventory

  • Improved supplier business continuity plans

  • Identification of qualified alternative suppliers

  • Periodic meetings to review top risks

Conclusion

We hope this article has given you a good overview of supply chain risk management. Risk management is not just about risk management analytics or risk management tools, but also about a fundamental shift in company culture and mindset.

By using these approaches, businesses can decrease their chances of losing money and reputation. And if you need experienced professionals to do it for you, BluEnt is just a click away.

We provide risk management solutions for large to medium scale projects for Fortune companies, eCommerce companies, homebuilders, tech companies, and energy companies. View how we've helped other businesses like yours here.

Ready to streamline your business with supply chain management services? Contact us now!

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