Supply Chain Risk Management 101: What it is and Why it Matters
Businesses encounter many risks, from new competitors to dramatic market shifts. But few are as complex and difficult to navigate as supply chain risks.
The world saw firsthand how damaging supply risks could be during the COVID-19 pandemic. Severe shortages of essential goods made headlines for months, and continue to be a challenge even more than two years later.
Risk management for supply chains must be a priority for every supply chain manager and business owner. But how do you go about it?
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What is Supply Chain Risk Management?
The supply chain refers to the flow of goods through a company. It covers how raw materials are acquired, processed into finished products, and distributed to end-users. Managing this is crucial because an efficient supply chain can help companies deliver goods and services faster and cheaper to customers, giving them a clear competitive edge.
However, supply chain management is tricky because it typically involves a global network of suppliers, manufacturers and shipping companies. A disruption in one area can bring down the entire chain.
Supply chains are also susceptible to geopolitical upheaval and economic downturns. The world experienced this firsthand during the COVID-19 pandemic and, more recently, the Ukraine-Russia conflict.
Identifying and mitigating these risks is the biggest reason companies need a good supply chain risk management program. Aside from preventing disruptions, it can help you identify reliable suppliers, shippers and third-party vendors by performing a supplier risk assessment.
What are Some Supply Chain Risks?
Supply chain risks can be categorized into two groups: external risks and internal risks.
Internal risks are those you can control and primarily involve your company’s processes and systems. These can include:
- Business risks, such as the resignation of a key employee, inefficient reporting, or poor management.
- Planning risks, which are the result of poor forecasting and planning. For instance, incorrectly predicting demand can mean running out of inventory at peak times.
- Manufacturing risks, which result from disruptions in your processes. For instance, a machine breaking down and halting your production is a manufacturing risk.
- Contingency risks, which happen if you don’t have crisis response or emergency plans in place.
External risks, on the other hand, are those that are outside your control. They are by far the hardest to predict and mitigate. These can include:
- Environmental risks, which are disruptions to your supply chain caused by disasters, geopolitical conflicts, and economic issues. The COVID-19 pandemic and the Russia-Ukraine conflict are good examples.
- Supply risks, which happen when your supplier fails to deliver raw materials on time. Disruptions can also occur if there’s a change in the business structure of one of your suppliers. This is a common problem that proper supplier risk management aims to minimize.
- Demand risk, which happens when there’s a sudden jump in market demand that your company cannot fulfil.
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Supply Chain Risk Assessment
Assessments are an essential part of risk management. In supply chain terms, this can help you list your business’s potential internal and external risks. More importantly, you can determine how well you can recover or mitigate them.
Risk assessment involves three steps: identification, analysis and evaluation.
Identification is the data gathering phase of assessment. Here, you take a bird-eye look at your business and review key bottlenecks and problem areas. Then, you should also take a broader view and include your suppliers and third-party vendors. Lastly, consider the state of your country and economy.
Next is analysis. After identifying a risk, you need to look at its cause and impact. Specifically, it’s crucial to predict the likelihood of a risk happening and the damage it can cause.
Finally, you evaluate each risk. Should you prioritize it because it’s a mission-critical risk? Or is its probability of happening so low that you can safely ignore it? Assessing risks this way allows you to optimize resources by focusing only on threats that matter immediately.
4 Supply Chain Risk Management Strategies You Should Be Implementing
Use the PPRR Model
The PPRR Model is a comprehensive risk management tool that you should use as the starting point of your program. PPRR stands for its four key areas: Prevention, Preparedness, Response, and Recovery.
Prevention helps you mitigate supply chain risks by having precautionary processes that minimize or eliminate incidents. The crucial thing to have here is a risk management plan that enables you to identify and prevent risks.
However, supply chain incidents are unavoidable. That’s why Preparedness is a key step. This allows you to plan an effective strategy to respond to these disruptions so you’re not caught unaware.
Response defines the exact steps you’ll take to contain and minimize the impact of supply chain disruptions. This is where you layout how key staff in your company will execute your emergency response plan.
Last is Recovery, which determines how the company will return to regular operations as soon as possible.
Risk management can be complex, but the PPRR framework ensures you cover all the bases.
Improve cybersecurity
One of the most significant supply chain risks is cybersecurity threats like data breaches, hacks and fraud.
In today’s world, the same digital tools that can dramatically boost your supply chain can also make it more prone to attacks. It pays to have robust cybersecurity protocols in place to prevent this from happening.
Start with an internal assessment of your systems. Ensure all your protections like firewalls, anti-virus and anti-malware software are updated. You can also look into DNS filtering or role-based access control (RBAC) to further strengthen your cybersecurity. And don’t forget to back up your data.
Next, make sure to vet all vendors you work with. Before signing any contract, perform risk assessments and compliance checks to ensure they’re legit and reputable. Software that gives you visibility to your entire supply chain is useful, as it can help you detect any unusual activity early on.
Lastly, ensure all your staff is trained in cybersecurity best practices to reduce social engineering attacks like phishing.
Have a logistics contingency plan
Logistics is a critical factor in your supply chain and requires its own contingency plan. After all, this is where most disruptions and delays happen, as the COVID-19 pandemic proved.
The best way to start your contingency plan is to map out your supply chain, then identify vulnerable points. For instance, over-reliance on a single shipper is a considerable supply chain risk since it can disrupt your operations if they go down. As part of your plan, you should establish alternatives and diversify suppliers.
It’s important to have a multi-part contingency plan. Have backups to your backup plan. This ensures that even disasters and geopolitical risks won’t halt your operations.
Prioritize supply chain visibility
One of the biggest advantages that businesses today have over their older counterparts is visibility into their supply chains. Software tools now allow supply chain risk managers to monitor every aspect and flag problem areas early.
Supply chain visibility enables brands and retailers to bring products to market faster and more efficiently. For instance, technology exists today to forecast when delays might occur in the supply chain due to a specific event, for example a quality issue at a factory. Businesses can then adjust subsequent events in their supply chain to mitigate delays in production and delivery of the final goods.
This software can also provide a window into your vendors and suppliers and ensure they’ve agreed to your company’s terms, conditions and ESG requirements.
The bottom line is that visibility is extremely important for effective supply chain risk management. But you need a reputable and reliable software platform to help you with this.
TradeBeyond Software’s extended product lifecycle management and supply chain management suite, under the umbrella of the TradeBeyond Cloud enables the visibility your company needs to remain agile.
Working with retailers, brands and importers headquartered in North America, Germany, Austria, Switzerland, Hong Kong, Taiwan, and China for over 20 years in 50 countries, TradeBeyond empowers buyers and suppliers by streamlining their daily efforts from product ideation to production, and beyond. For more information on TradeBeyond Cloud and how it enables responsible sourcing by helping you map your suppliers, contact us today to schedule a demo.