Supply chain risk management (SCRM ) has gained prominence since 2020. Earlier, it was often an afterthought for most business leaders. Business leaders, at best, would be aware of the firm’s key suppliers, keep a watch on purchasing costs and get involved occasionally in resolving emergent supply chain issues.
The pandemic changed all this. Wars, sanctions, lockdowns, industrial strikes and natural disasters - there are many causes of supply chain disruptions. The pandemic and the war in Ukraine have disrupted supply chains around the world, causing widespread shortages and delays, affecting businesses across the globe and industries. Global supply chains can be put at risk by seemingly minor incidents, such as a grounded container ship blocking the Suez Canal.
Any business is potentially at risk of a production standstill, a contractual penalty or reputational damage from an incident anywhere in the world.
It is critical, therefore, for businesses to deploy a well-thought-out supply chain risk management program to secure their supplier relationships and prevent supply bottlenecks.
To do that, businesses need to understand the three parts of risk management:
- Risk identification
- Impact assessment
- Risk mitigation
Identifying the risk is the first step in supply chain risk management. Knowledge of the risk is essential to be able to address the risk. This requires establishing risk profiles for all the elements of a business’s supply chain.
A risk profile is the evaluation of the threat faced by a business. The evaluation of the risk is conducted based on an established and defined process. From the point of view of supply chain risk management, a business’s suppliers, locations, ports, etc. should all have risk profiles.
Risk identification is a three-step process:
Identifying the Risks to be Monitored
Every business must decide which segments of its supply chain it will actively monitor as part of its risk management program. Typically, enterprises consider such factors as purchasing volume, impact on sales or scarcity while prioritizing the segments. All direct material suppliers are usually monitored together with supply paths and structures as well as internal production sites and distribution centers. Types of supply chain risks include financial risks, legal risks, scope of schedule risks, environmental risks, sociopolitical risks and project organization risks.
Measuring the Risk
To measure risk, every business must evolve its risk assessment methodology. Many firms use a risk scorecard. Such a scorecard lists the key risk indicators, their importance and their scores. The scorecard gives an easy-to-understand overview of the existing risk status on a predefined numerical scale.
Sifting through a large volume of data to only retain relevant data is a key challenge of the risk identification and evaluation process. To manage global supply chain risks, data is sourced from government lists, social media sites or news outlets. Such data collection and data updating should be automated to the extent feasible when setting up the supply chain risk management system.
Filtering out data that is not relevant is also a key component of the SCRM process. Incorrect information or a wrong alert can overburden the SCRM system and potentially render it redundant. Also, for easy understandability, the data needs to be standardized. For example, credit ratings are standardized as AAA, AAA+, etc. Data standardization helps present a clear, easy-to-understand picture of the risk in the business’s supply chain.
The second step of the SCRM process involves assessment of the impact of all the potential risk scenarios. Impact assessment enables the focus of measures that need to be implemented when a crisis occurs.
Impact assessment is a three-step process:
Create a Risk Inventory
Create a risk inventory by considering all business partners and suppliers. Additionally, include countries, locations and logistics hubs, all of which represent supply chain risk.
Identify the Parameters to be Assessed
The important parameters required to be assessed include:
- Total time to recover
- Extent of substitutability
- Impact on corporate image
- Number of alternative suppliers available
- Number of customers affected
- Cost of remedial marketing/sales efforts
Create a Risk Assessment Chart
Based on the identified risks, the collected data and the assessed impact, create a risk assessment chart. The chart can be color-coded based on risk level and impact. The risks in the ‘red’ zone, for example, could be targeted for additional scrutiny and monitoring.
The steps for risk mitigation complete the SCRM process. The mere identification and assessment of risks will serve no purpose if actions are not taken to prepare the business to react appropriately to the occurrence of a risk event.
Risk mitigation involves a set of preventive and reactive actions to prevent a risk event from occurring or to minimize its impact. Risk mitigation then becomes a proactive step to address risk and ensure success in the long term.
The risk mitigation process, therefore, requires the documentation of all risk prevention actions and responses to risk occurrence. The various risks can also be grouped into separate categories. The documentation will contain details of the individual risks and actions to be taken.
Having a risk-mitigation plan is an indispensable part of the SCRM program. The alternative would be to scramble for solutions after the risk event has occurred. A reactive response, under conditions of stress, is likely to be suboptimal with potentially substantial business and reputational damage.
Supply Chain Risk Management Strategy
An effective supply chain risk management strategy involves identifying potential risks across the end-to-end supply chain, assessing their likelihood and impact, and developing mitigation plans. As part of supply chain risk management strategy, enterprises look to establish cross-functional risk management teams to define risk categories, conduct scenario analyses, and maintain a risk register database. That's because supply chain mapping helps enterprises identify high-risk areas to enable visibility into their operations, suppliers, and market dynamics.
Response strategies include diversifying suppliers as part of contingency plans for disruptions, deploying continuous monitoring mechanisms like control towers and early warning indicators enable proactively responding to risks.
Mitigation strategies range from integrating redundancy, flexibility, and excess capacity to taking out insurance into the plan, with the goal of building resilient supply chains that can rapidly adapt to disruptions without fuss. An ideal supply chain risk approach is the one that evaluates all dimensions of risk in order to develop pragmatic, cost-effective strategies.
Traditionally, it was believed that a well-thought-out, comprehensive SCRM plan was required only for large businesses. This was partly due to the cost of developing a meaningful SCRM plan. A definite investment in time, effort and money was required in identifying what to monitor, managing the complexity of data collection and getting organizational buy-in.
However, as the world and businesses become more interconnected and supply chains and regulations get more complex, SCRM is an activity that should be positioned high in the list of priorities for every business.
Businesses can now leverage Artificial Intelligence (AI) and Machine Learning (ML)-enabled software tools that have helped reduce the cost of designing and deploying an SCRM plan.