Supply chain risk definition
Risk refers to the probability of any undesired event caused due to external or internal vulnerabilities which can be avoided by using preventive actions. Supply chain risk includes any type of risk that is associated with a company’s supply chain. These risks may be anything ranging from natural calamity in a region that the organization procures raw material for production activities to transportation strike due to which finished goods cannot be supplied to the market. Supply chain risk is the deviation from the expected or standard performance of these functions. Including demand planning, sourcing, production, supply planning, transportation, and reverse logistics.
What is supply chain risk management?
Supply chain risk management refers to an organization’s coordinated efforts to identify, monitor, detect, and mitigate any threats to supply chain that can consequently affect the company’s continuity and profitability. Cost volatility, supplier financial issues and failures, material shortages, and natural and manmade disasters are some of the primary examples of supply chain risk. Global supply chain leaders use supply chain risk mitigation strategies and software in order to foresee potential issues and adapt to these risks and unforeseeable supply chain risk as quickly and efficiently as possible.
Types of supply chain risk and how to mitigate them
Preventing risks completely is next to impossible. However, global supply chain leaders are taking measures which can reduce or mitigate against the impact of the supply chain risk. According to several global supply chain leaders, the five key areas of supply chain risk include – Price, Quality, Delivery, Legal compliance, and Reputation. SpendEdge’s supply chain risk mitigation team have curated some smart ways to combat these risk:
Price risk exposure for businesses comes in the form of inflation and volatility. Sudden upswings in prices can have an adverse effect on the business. One of the most efficient ways to combat this situation is to set longer-term contracts which can reduce the impact of price hikes in the future. When deflation occurs, and the contract is made on price agreements for the long term, the company could have lost out on a huge advantage. Another aspect to manage risk is in relation to volatility wherein there is a sudden and rapid movement of markets in an unpredictable pattern.
Quality failure can be mundane, but the consequences can be severe. Quality risk management is abundant with a range of methodologies that aim to bring a scientific certainty to the drawbacks and unpredictability of mass production. Six Sigma is a quality assurance process that proves to be a helpful guide to automate as much of production as possible. Thereby minimizing the chances of human error. This also promotes increased lean and efficient processes.
The supply chain and logistics teams are the first to be blamed when delivery fails to materialize. This is true not only in the case of tangible goods but also in the case of intangible goods. Risk can impact business in the form of non-delivery, late delivery or early delivery. The case of late delivery can be just as costly for businesses operating just-in-time models, as suppliers aim to free warehouse congestion by releasing shipments early. Managing the contingencies can be crucial here.
Organizations can often find themselves liable when a supplier does something illegal. For instance, in the UK Bribery Act, if a supplier commits corruption in the course of its business, the clients may be subject to huge financial penalty. It is vital to ensure that the contracts are robust enough to include provisions to protect the buying company from such legal complications. The only way to ensure that such supply chain risk is avoided is to train suppliers and purchasing managers to be aware of the law and take a zero-tolerance attitude to any illegal actions.
This relates to practices wherein the general public has some pre-conceived notions of what businesses should be conducting, and brands could get are tarnished when they have been believed to contravene a moral code, if not legal obligation. The key area for supply chain risk assessment professionals to analyze is the actions of their suppliers. Consumers hardly make any distinction between the brand and the supplier in the chain. Any offense committed by the supplier is generally considered to be a fault of the brand and can ruin the brand reputation. Protection from reputational risk can only come from proactive monitoring and enforcement of standards, without which brands may be highly vulnerable to reputational risks.
Looking for a supply chain risk mitigation strategy to suit your business needs? Look no further, get in touch with our industry experts for best in class supply chain risk management solutions.
Best practices in supply chain risk management
Identify supply chain elements and processes
It is essential for companies to who seek supply chain risk mitigation to gain clear visibility into all the aspects of their supply chain and effectively monitor and identify high-risk events and activities. Unless there are reasonable traceability and visibility into the supply chain, it is highly difficult to understand and manage risk and thereby the likelihood of adverse events are higher.
Limit access with the supply chain
Elements that travel across the supply chain are can be accessed by several others. It is essential to limit such access to only as much as necessary for those elements to perform their roles. It is crucial to monitor external access for supply chain risk.
Undertake awareness training
Putting a strong supply chain risk mitigation strategy in place requires significant attention given to training personnel on supply chain policy, procedures and applicable management, operational and technical controls and practices. Building an IT Security Awareness and Training Program provides guidelines for establishing and maintaining a comprehensive awareness and training program.
Use defensive design for systems
Using design concepts is a common practice to deliver robustness in security, quality, safety, and diversity that help in achieving supply chain risk management. Design techniques apply to supply chain elements, element processes, systems, information, and organizational processes throughout the system. The creation, testing, manufacturing, delivery, and sustainment of the element throughout its life are included in element processes. Business processes encompass issuing requirements for acquiring, supplying and using supply chain elements.
Strengthen delivery mechanism
Delivery, including inventory management, is one of the most crucial supply chain, which has great potential for being compromised. Today, delivery can be physical in the form of hardware or logical such as software patches and modules.
Assure sustainment activities
when a system becomes operational, the sustainment process begins and ends when it enters the disposal process. This includes system maintenance, patching, parts replacement, upgrade and other activities that keep the system operational. Any change to the system or process can cause opportunities for subversion throughout the supply chain.