- What supply chain risk management is
- What risks you may encounter in a supply chain
- How you can create a risk management plan
What is supply chain risk management?
The principle of supply chain risk management revolves around ensuring a steady stream of the materials needed to make or sell a product. Whether a business builds complex industrial products like cars or is a smaller operation like selling hamburgers, its process depends on using things (like parts of engines or hamburger buns) made by other companies.
If deliveries from a supplier unexpectedly stop, one might not be able to deliver on one’s products – it’s hard to make hamburgers without the buns. These sorts of worries have led to a lot of thinking about the best ways to perform supply chain risk management in various contexts. Clearly, managing the risk of interruptions to one’s supply chains is vital for businesses of any size.
It’s important to know where the vulnerabilities of one’s supply chain lie. Also, remember that risks may emerge from both expected and unexpected sources. Once you know where those risks lie, you can start working to minimize them by building a risk management plan. As we will see, these plans will rely on collaboration with suppliers, diversifying one’s sources for materials, creating a reliable and varied transport network, and constant monitoring.
What supply chain risks do I need to manage?
Experts have developed many different ways of looking at the risks inherent in doing business in a context where large, border-crossing supply chains are typical. We’re even more aware of these risks in the time of our global pandemic. Some of the most commonly written about sources of risk are as follows:
- Environmental risk: One needs to be aware of natural disasters like flooding, hurricanes, and wildfires, especially as climate change makes these events more likely. If a crucial manufacturer has its factory at the bottom of a flood plain, that’s something to include in a risk management plan.
- Political risk: Political events, from large protests to terrorism, also affect supply chains. Though these can be harder to predict, sometimes a manufacturer might be trafficking in politically contentious goods; for example, animal rights protestors may target a meat processing plant.
- Process risk: Process risk has to do with what could go wrong in the manufacturing process downstream in the supply chain. There might be bottlenecks in producing a crucial good, which could cause chaos. Factories or farms with old or unreliable equipment represent a process risk.
- Supplier risk: The solvency of a retailer’s suppliers is another crucial aspect of risk management. If a supplier’s business is not stable, bankruptcy or scaling back business can hurt one’s supply chain.
The process of thinking about supply chain risk management should start with considering these risk types. Businesses that neglect making proper risk management plans can face challenging situations.
How can I make a supply chain risk management plan?
The first step to managing supply chain risk is to identify what could go wrong systematically. A good supply chain risk management plan starts with considering the factors mentioned above but goes beyond just thinking about them. Instead, one needs to work on risk mapping.
Risk mapping involves drawing out each step of the supply chain from source to manufacturer to warehouse to retailer. It’s a project that can’t just extend to the sources that one directly deals with; think of the source of your sources as well. Of course, their suppliers too – all the way back to the natural resources necessary for your product.
The reason for going back to the source of the products is that any interruption to any of the links will reverberate to the top. Thus, risk maps are often global in scope, stretching to distant corners of the world.
Once you have sketched the supply chain in as much detail as possible, establish the different types of risks you need to evaluate at each stage. What’s the chance of a natural disaster in the areas where you extract resources? Is a particular manufacturer located in a politically unstable part of the world? Answering these questions will show where the mitigation of risk needs to happen.
How can I manage risk in my supply chain?
The ways of mitigating risk depend on many business-specific factors. (How many other suppliers are there? What volume of a product is necessary?) Still, there are a few approaches that will work in many contexts.
The first, and often the best, option is to collaborate with one’s sources. Learning with greater precision about their supply network will help your plan become better. Also, a customer can push a source to improve its own supply chain risk management. The same steps taken to control one’s supply chain risk can help the companies within that supply chain – anything that improves their reliability decreases your risk.
One can also plan for an interruption stemming from a specific manufacturer by building relationships with other sources who can provide the same product. Having access to a diversity of sources ensures that the closure of one business or an interruption to production at one factory won’t be disastrous.
One often overlooked area of the supply chain is transport. The failure of a piece of infrastructure, like a dock or airport, can cause massive delays. Ensuring one has alternative ways of receiving the materials is incredibly important.
Finally, it is crucial to continually monitor the supply chain to ensure that the plan is up to date and features correct information. Data-driven insights help identify the supply chain links that are becoming riskier and enable proactive steps to reduce that risk.
Final thoughts on creating a supply chain risk management plan
When a product’s components have passed through thousands of hands before they reach a consumer, it might seem daunting to create a risk management plan covering an entire supply chain. Hopefully, the tools and tactics outlined in this article make it seem less so because the complexity of supply chains makes the work essential.
Finding pain points in your supply chain can be challenging. That why SupplyPike created its OTIF Radar app with data-driven, actionable insights. Track your carriers, your manufacturers, and your items’ flow to help you create a risk management plan. The best part? It’s free for 14 days!