As supply chains grow increasingly global and complex, the risks associated with them have multiplied and intensified – supply chain risk management must be a key focus for all businesses.
Increased supply chain complexity brings with it “more potential failure points and higher levels of risk,” a McKinsey article posits. The 2021 Supply Chain Resilience Report, published by the Business Continuity Institute (BCI), reported a higher number of supply chain disruptions in 2020 than in any other year in the report’s history. COVID-19 was a key factor, of course, but many other ongoing issues have caused – and will continue to cause – disruption within the supply chains of organizations operating domestically and globally.
The strategies organizations develop to identify, measure and manage supply chain risk must be sufficiently robust to tackle these potential threats. In this guide, we examine today’s key supply chain risks, identify the best ways to approach risk management in supply chains, and offer suggestions on how you might address your organization’s supply chain risks.
What is Supply Chain Risk Management?
Supply chain risk management, by definition, is the process by which organizations take action to identify, assess and mitigate the risks they face within their entire supply chain.
TechTarget describes supply chain risk management (SCRM) as: “The coordinated efforts of an organization to help identify, monitor, detect and mitigate threats to supply chain continuity and profitability.”
Supply Chain Risks and How To Mitigate Them
Supply chain risks are numerous and varied. They can stem from natural disasters like earthquakes or flooding disrupting your suppliers’ operations or from hostile actions such as terrorist attacks, thefts or acts of war. They can arise from organizational failures such as supplier bankruptcy or inefficiency. In today’s technology-driven world, supply chain risks increasingly stem from issues like IT outages, data breaches or cyber threats.
Strategies to address supply chain risks include:
- Re-engineering your roster of suppliers.
- Gaining deeper insight into supplier operations.
- Developing a clearer picture with robust data around your organization’s global supply chains.
Types of Supply Chain Risks
Supply chains are becoming more global, something that can deliver significant benefits. The Chartered Institute of Purchasing and Supply identifies reduced costs, increased innovation, the ability to explore shared expertise, and the potential to upskill workforces among the advantages of globally sourced goods.
However, this globalization can also present risks. Underpinning these risks is a “common theme” at the heart of the supply chain arena that organizations have faced more frequently in the last decade. More often than not, organizations lack the processes needed to effectively spot and manage developing supply chain risks in an ever-growing, interconnected world.
The first step in risk mitigation is identifying the type of risk. Supply chain risks encompass both internal and external risks – we’ve outlined common examples below.
Internal Supply Chain Risks
Some risks in supply chains come from internal sources. These can include:
- Risks caused by disruption to your internal operations or processes. For instance, a mechanical breakdown prevents you from producing your product at the volumes needed.
- Risks resulting from people issues. For instance, the departure of a key member of your purchasing team without sufficient succession planning, which leads to fractured supplier relationships.
- Risks arising from inadequacies in your compliance or risk management processes. For instance, a less-than-robust business continuity process.
- Risks brought about by a corporate culture where transparency and honesty are not encouraged.
External Supply Chain Risks
Of course, many elements of supply chain risk management originate outside of your organization. Supply chain risk mitigation must consider these external risks as well as those that develop within the business. External supply chain risks include:
- Unpredictable demand. This was seen very clearly during the height of the coronavirus pandemic, when ‘stay at home’ orders led to unprecedented demand for specific consumables. It can be difficult to predict drivers of consumer demand and ensure you have access to appropriate volumes of stock.
- Risks to supply volumes. This is not just in light of unpredictable demand but because of failures in production, material shortages, environmental factors, economic, social or political issues, or the viability of your key suppliers.
- Cyber risk. In its paper on supply chain complexity, the Supply Chain Risk Management Consortium notes that “We often take for granted the use of information technology (IT) to make life less complex. […] Organizations will continue to be relentless in their search for IT applications that simplify the supply chain and the transactions that flow across it.”
- This is a positive, obviously, but increased use of technology also increases the risk of cyber threats. Any organization capitalizing on the digital and technological solutions available to streamline supply chains needs to be privy to the accompanying risks and take steps to identify and mitigate them.
- Globalization driving increased lead times. As we mentioned above, globalized supply chains can diversify supplier choice, reduce costs and smooth logistical volatility. But they can also mean longer lead times, as shipping (and the unpredictability that can accompany it) needs to be factored in.
- Other risks caused by the global nature of your supply chain, such as communication challenges, exchange rate fluctuations, or regulatory or legislative issues. In 2021, the disruption caused by the UK’s departure from the EU provided a timely example of the type of disruption that can be caused by changes to legislative requirements.
- Negative publicity and reputational risk. With respect to business ethics, CSR and ESG are all watchwords for today’s organizations, and supply chain transparency is under the spotlight. A transgression by any of your suppliers – whether in terms of treatment of employees, fair trade and sourcing, pollution or any other failing – reflects poorly on your business. The longer, more complex and more geographically diverse your supply chain, the harder it can be to keep a grip on these issues. Cutting through to the information that matters can be a challenge.
- Lack of control over your supply chain. Multinational organizations and global supply chains complicate supply chain risk management. BCI’s Supply Chain Resilience Report 2019 found that while 12% of disruptions occur amongst tier 3 suppliers and beyond, 67% of organizations fail to question the business continuity arrangements of suppliers within those tiers.
- Having adequate oversight of all your entities and their supply chains can be a challenge; a comprehensive approach demands that you understand all your supply chain risks and how to mitigate them.
Steps for a Successful Supply Chain Risk Management Plan
Risk management in supply chains can be multifaceted, but there is a lot to consider.
If you seek to establish or improve your supply chain risk management plan, where should you start?
As with so many elements of business strategy, order and organization are the maxims here. It’s essential to take a systematic approach to supply chain risk management if you want to ensure all your potential hazards are identified, understood and appropriately managed.
Supply chain risk management is a necessary part of business strategy, and while there are numerous aspects to keep in mind, you can begin by taking a few key steps.
Strategies To Address Supply Chain Risks Include:
1) Assess your current risks. A supply chain risk assessment is an excellent first step in identifying priority areas to focus on. Your risk and compliance teams only have so many resources; building an action plan that hones in on identified priority risks will enable them to spend their time where it is most needed and delivers the most impact.
2) Expand your supplier options. A PWC survey of U.S. CFOs carried out in May 2020 found that over half were driven by COVID-19 related disruption to develop additional, alternate sourcing options. Relying on a small number of suppliers increases your risk exposure should one of them encounter a disruption.
Take the opportunity to explore the health of existing and potential suppliers; 45% of respondents to the PWC survey plan to improve their approach here. Developing a deeper understanding of supplier health will help you to prioritize your key suppliers and identify where you may need to expand. Do your due diligence around the vulnerabilities of potential partners to ensure any new relationships take your supply chain risk mitigation measures in the right direction.
3) Make use of automation to improve the speed and accuracy of supply chain decision-making. Just a third of CFOs questioned in PWC’s research plan to do this Yet, the benefits of technology in automating and therefore honing your supply chain risk mitigation are well-recognized.
A 2020 report from the World Economic Forum notes that businesses “must rapidly innovate, take advantage of new digital tools and leverage cloud services to emerge from the [COVID] crisis ahead of their competitors.”
Automation can help you make better decisions on supply chain issues by giving you clear oversight of your operations and their supply chains.
4) Treat your suppliers as partners. Work with them to identify supply chain risks and how to mitigate them. Your suppliers’ business continuity and disaster recovery plans should dovetail with your own for watertight continuity planning. Be honest about upcoming requirements – even when these might mean they face lower sales volumes. Transparency is vital if you want to build long-lasting partnerships to enable both suppliers and buyers to develop successful strategies to address supply chain risks.
5) Implement the highest standards of measurement and reporting. Clarity, transparency and completeness are essential here – you need data that you can trust, and confidence that your entire organization’s supply chains are covered.
Explore how technology can help: BCI’s Supply Chain Resilience Report 2021 found that more than half (55.6%) of organizations are now using technology to help analyze and report on supply chain disruptions.
Specifically, optimizing the use of technology in your compliance and risk functions can be a worthwhile investment. Yvette Hollingsworth Smith, former Chief Compliance Officer and Regulatory Innovation Officer with Wells Fargo, flags that, “typically, compliance and risk management organizations have a lot of manual processes.” Yet, investing in compliance technology can pay huge dividends in helping organizations achieve the transparency and visibility needed to manage supply chain risk.
6) Review and revisit your supply chain risk management plan regularly. Supply chain risk mitigation is not a one-off exercise; the risks you face will evolve continuously, and you need to reconsider your approach periodically.
Choosing the Right Supply Chain Risk Management Solutions
When it comes to establishing a supply chain risk management plan, two things are central to your success: giving supply chain risk management the prominence it merits and implementing a plan to tackle the risks you identify.
Both of these can be challenging, especially for time-pressed risk and compliance teams facing an ever-growing range of demands. Even understanding the ‘current state’ in terms of your risks and opportunities can be difficult if you do not have clear oversight of your entire organization and its suppliers.
With supply chain risks ranging from the loss of intellectual property due to failings in your supplier ecosystem to the ramifications of a natural disaster, it’s no surprise that compiling a methodical response can seem overwhelming.
The good news is that there are solutions that can support your supply chain risk management strategy.
Supply chain risk management software is used by increasing numbers of organizations to capture data on their supply chains and the risks they present. Machine learning can be harnessed to provide an accurate picture of your current risks and mitigation strategies. Cyber risk scorecards deliver clear snapshots of current performance and risk status, and software designed to ease the compliance and risk burden can give your teams a more efficient and effective way to manage their workload.
Diligent’s solutions are trusted by businesses wishing to bolster their governance practices. 57% of manufacturing organizations in the Fortune 100 trust Diligent to power efficiency, boost performance and fuel innovative thinking.
The complex supply chains of today’s manufacturing companies make them a good case study for supply chain risk management, with much to learn for other sectors. To find out more about how Diligent’s solutions are powering modern governance for manufacturing industries, you can visit our website.
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