How Supply Chain Risk Management Protects Businesses

It doesn’t take more than a cursory glance at how the COVID-19 pandemic significantly impacted world commerce to see the importance of having a supply chain disruption plan. 

A business can’t always control their supply chain, but they can control how they react to disruptions.

With the rise of globalization, businesses operate in increasingly complex environments where various uncertainties can occur at any point. One of the most significant challenges businesses face is managing their supply chains effectively. 

Supply chain risk management (SCRM) is essential for any business to minimize the likelihood of disruptions and effectively respond when they occur. Doing this due diligence can actually be a competitive advantage if the company’s methodology is sound and their decision-making is strong.

Globally, 89% of companies experienced a supply chain issue within the last five years. Some were prepared for disruptions to business continuity. Others were not.

Let’s discuss why supply chain risk management is so important to the sustainability of a business and how mitigation strategies and supply chain security can reduce the risk of exposure.

Main types of supply chain disruptions 

It's crucial for every business owner to understand the main types of supply chain disruptions in order to develop effective procurement contingency plans. 

For the private sector, risk events could be limited or scale up to national security events.

Pandemics.

This one we know all too well. Pandemics don’t even have to be global. Local pandemics or epidemics can also impact production facilities in a single region, which can cause the supply chain apparatus to struggle. 

Natural disasters.

Natural disasters such as earthquakes, hurricanes, and blizzards can occur suddenly and cause significant disruptions to the supply chain. For example, a hurricane can impact not only the suppliers in its path but also the transportation systems that goods rely on. 

To prepare for natural disasters, companies should develop a contingency plan which details the necessary steps to take in case of a supply chain disruption. 

Transportation failures and delays.

Logistics and transportation issues such as port congestion, customs delays, or a big boat clogging up the Suez Canal can potentially cause significant setbacks and are a constant supply chain threat. 

These disruptions can result in delayed shipments, stock shortages, and, ultimately, increased costs. 

To mitigate the impact of logistics and transportation issues, companies should establish clear chain-of-command communication structures, develop preparedness and contingency plans, and work with partners who are equipped with the resources needed to navigate these situations effectively.

Product problems.

Demand-related disruptions occur when there is a drastic shift in consumer behavior, leading to a sudden increase or decrease in demand for certain products. Retailers know this all too well. 

This shift can be caused by panic buying, stockpiling, or even reduced consumer confidence due to external factors.

Price fluctuations.

Price disruptions can have many causes, including changes in demand, shifts in supply, geopolitical events, natural disasters, or market speculation. 

When the cost of raw materials or labor increases significantly, it can have a ripple effect throughout the supply chain, leading to price increases, shortages, and delays. Price disruptions can also occur when there are sudden changes in currency exchange rates, trade policies, or transportation costs that affect the cost of importing or exporting goods.

Cybersecurity threats.

Malware, cybersecurity breaches, and cyberattacks have become a significant concern for businesses and their information and communications technology (ICT). Supply chains and information technology are particularly vulnerable to such attacks, as they involve the exchange of sensitive data between different parties. 

Cybersecurity breaches can cause significant damage by compromising operations, exposing confidential information, or affecting customers. To protect against cyber supply chain risks, companies should implement robust data protection measures, including firewalls, intrusion detection systems, secure critical infrastructure information systems, and train employees on cybersecurity best practices.

Dealing with known risks in the supply chain

Global supply chain ecosystems are highly complex networks with many stakeholders and many influences. Any supply chain carries risk — that’s their nature — but ecommerce companies can at least be aware of and prepare for some threats.

Document and ID any potential risks.

The first step in dealing with known risks in the supply chain is to perform a supply chain risk assessment and audit. 

Organizations should conduct a comprehensive risk assessment to identify risks and use various tools like SWOT analysis, PEST analysis, or scenario analysis to identify risks and prioritize them based on their likelihood and impact.

Create a framework for supply-chain management.

Having a risk management plan is vital. A risk management plan should outline steps to take in the event of a crisis, such as alternative suppliers, backup inventory, or shifting production to a different location. 

The plan should be regularly reviewed and updated to account for any new risks that may arise. Identify the key metrics that will help show how well a company is doing.

Continuously monitor the identified risks.

Monitoring helps in risk identification and also assesses how good a company is at mitigating risks. Organizations can use monitoring tools like supply chain analytics, real-time data feeds, and exception management systems to monitor their supply chain's performance and identify any disruptions in real-time. 

Automation can or even artificial intelligence can help here.

Implement a system of governance and regular review.

A risk management framework is never done. All plans and processes should be regularly reviewed and updated to ensure they account for new and emerging threats. Having a standard review cycle, like annually, will help to keep a supply chain risk management strategy up to date with changing environments and build stronger supplier relationships.

Accounting for unknown risks

Natural disasters, reputational risks, political instability, and economic uncertainty can all lead to supply chain disruptions. While this may be out of your control, there are steps a company can take to manage risk in their supply chain and minimize the impact of potential disruptions. 

Enact strong defenses.

This can include legally and tangibly. Make sure that any appropriate legal contracts — such as Requests for Proposals — include language that protects a company in case of unexpected supply chain disruptions. 

Strong defenses can also include employee training to not only avoid threats, but also mitigate them.

Build a culture of risk awareness.

Having an organization that is aware of business threats and will proactively take steps to avoid them will go a long way.

Acknowledgement

This starts with employees being comfortable with accountability and delivering bad news. It should be a cultural norm to ingest bad news and pivot to a response quickly.

Transparency

Employees should understand the company’s risk tolerance and be empowered to raise their voice when a potential threat is identified.

Responsiveness

A business should be able to react quickly and not be restricted by layers of bureaucracy. Employees should have ownership in their workplace and feel responsible for its safety.

Respect

Employees should respect their workplace and their environment and ensure that the needs of the organization are placed over their personal wants.

Effectively managing a disruption

Disruptions can — and likely will — happen. Those aren’t always something an organization can control, but they can dictate how they respond to them.

Communicate with customers.

Managing expectations and constantly communicating with customers will go a long way in maintaining relationships with them. Be clearly stating that there may be issues with delivering orders and why they may be delayed will go a long way.

Evaluate all critical components of the supply chain.

Mapping the supply chain life cycle allows a company to identify potential supplier risks and their likelihood of occurrence. This process can help track the supply chain's critical points and reveal pain points. 

Estimate available inventory.

A business should get an accurate number of what they can deliver with on-hand inventory. It may be enough to weather this disruption or it may not, but they should have a firm understanding of the current situation.

Optimize production and distribution capacity for safety.

This is a best practice even when supply chains are operating at peak efficiency. This process may also identify ways to get around short-term or limited disruptions.

Identify logistics flexibilities.

This is related to supply chain optimization and is a process where companies may be able to find new ways to leverage their supply chain to mitigate one problem. 

For example, if there’s one supplier having a problem, another in their network may be able to pick up the slack.

Evaluate cash flow impact.

Finally, a business should understand the impact to their bottom line and profitability. The impact may be fairly negligible — or it may be big enough to cause changes in their operations to compensate for reduced cash flow.

The final word

Supply chains are highly complex and require constant attention. Developing a risk management strategy is vital to keeping the supply chain operating smoothly and shielding the business from unexpected disruptions from providers. 

It brings order to chaos and adds a layer of protection to the customers and the business.

FAQs about supply chain risk management