In today's increasingly rapid and globalised world of business, companies count heavily on complex supply chains to deliver their goods and services in a relevantly efficient way. However, with that level of interconnectedness also comes a barrage of possible disruptions, from natural disasters and political instability to cyber attacks and failure of supply vendors. This is where Supply Chain Risk Management (SCRM) comes in. It refers to the process of systematic identification, assessment, and mitigation of risks which threaten the flow of goods, information, and finances in a supply chain. By managing these risks proactively, companies could improve resilience, continuity, and bottom lines. Supply Chain Risk Management is a better competitive advantage than a defensive strategy in an unpredictable world.
What Is Supply Chain Risk Management?
Supply Chain Risk Management (SCRM) or Supply Chain Management SCRM is a systematic process of adding, identifying, assessing and prioritising the risks associated with the organisation with an organised supply chain. In other words, it encompasses the strategies employed to mitigate them within the continuity and profitability of business operations.
SCRM, or supply chain management, is a mechanism that prevents a company from unforeseen disturbances and, at the same time, opens avenues for improvement in the resilience and efficiency of the supply chain. The need for effective supply chain risk management becomes critical, as the increasingly complex and consolidated world supply chains necessitate it.
Effective management of supply chain risk entails understanding a bigger supply chain ecosystem of extended networks that include third-party vendors, service providers, and customers. This broader perspective helped to identify one's upstream suppliers and their sources, enhancing the security and compliance of supply chain practices. Risk management basically implies cost-reducible losses or damages within a company or organisation as a whole and how it conforms to the supply chain. To effectively reduce cost-related losses or damages across your organisation and ensure smooth supply chain operations, consider joining the Projects Risk Management, Objectives, Methods & Assessment course offered by the British Academy for Training and Development.
4 pillars of supply chain risk management
With the passage of time, research has shown that most risks to the accomplishment of supply chain management operations can be categorised within the following four (4) pillars:
1. Supply Risks
Supply risks can stem internally and externally due to various disruptions, including source materials, product manufacturing, or the flow of goods from point A to point B in the supply chain. On account of such interruptions, the parameters of transportation, lead times, prices, and inventory might be affected.
2. Demand Risk
Demand risks, without the slightest doubt, are totally unpredictable owing to their oftentimes being dependent on volatile consumer behaviour. This category of risks may cause an invasion of promotions and pricing, losses, and expenses that may lead to bankruptcies or near bankruptcies.
3. Process Risk
Process risks can be sorts of well-known risks and unknown risks. Known risks are basically manufacturing yield, receivables, payables, and capacity. Unknown risks take into account technology, such as a cyberattack, and disruptive events of an unforeseen nature on the supply chain. Minimising process risk is achieved via risk assessment and evaluation.
4. Environmental/Ecosystem Risks
This risk includes political conflicts, exchange rate fluctuations, environmental regulations, and such weather-related "Acts of God" incidents, such as hurricanes, earthquakes, tsunamis, and more natural disasters of unpredictable nature.
What Are Best Practices for Managing Supply Chain Risk?
Having a strong SCRM strategy will help you to get ready for the several dangers and problems facing the supply chain. Building a strong risk management strategy calls for several suppliers, local sourcing, awareness of risk tolerance, and modeling of extreme events.
1. Source Multiple Suppliers
The pandemic revealed major flaws in international retail and manufacturing supply networks. Some businesses switched to multisource modeling when output delays first began; this provides a network of backup suppliers if one supplier loses access to a product. Keeping an SCRM plan top of mind, an important consideration when sourcing suppliers is to look for one that produces out of multiple locations that way, they aren't subject to a single point of failure in the case of an environmental event.
Both large corporations and small companies stand much to profit from sourcing from several vendors. Critical activities like new employee onboarding or system implementations have been postponed as a single supplier either failed to provide the required tools or sent too little. Diversifying suppliers guarantees smoother operations and helps to prevent these interruptions. Organisations that establish a benchmark of supply chain indicators and keep good ties with suppliers can forecast future requirements and guarantee that they have the proper suppliers in place to satisfy demand.
2. Establish for Nearshore Sources
How does a company control risks when those risks are beyond their influence, such as force majeure or natural catastrophes? Regrettably, none of us can have super control over the weather; this is a big consideration in supply chain logistics.
Companies can instead find solutions by selecting suppliers and distributors closer to their primary activities, so gaining benefits from shorter distances and faster access. This lowers the probability of delay due to weather-related problems as their product and parts trip distances will be decreased. Many companies are changing their strategy, and Stanley Black & Decker was said to be hastening plans for two new Mexican and one Texas factory in 2021. Having nearer points of supply grew crucial to the toolmaker's company when ports closed and freight costs rose sevenfold. Similarly, Toyota revealed plans to expand its manufacturing operations in the United States in 2022, concentrating on creating new plants in Alabama and Kentucky. Having suffered major supply chain problems as a result of worldwide shipping delays and rising freight expenses, the firm made this decision. Toyota effect to cut transportation costs and shorten supply chains while guaranteeing more resilient supplies to satisfy rising consumer demand by relocating manufacturing closer to its core market. Although local providers could be more expensive, less travel time and decreased risk exposure compensate for those expenses.
Nobody claims you have to exclusively buy from local or domestic sources. Every year keeping a healthy balance of providers and completing proper due diligence helps an organization avoid one supplier dependencies.
3. Maintain Inventory Buffers
By lowering warehouse expenses, the justintime (JIT) supply chain generates cost savings. Some industry experts contend, meanwhile, that companies have cut too far into this area and now have to rebuild inventory. Adopting a "just in case" strategy may be cost-effective since the backups help companies to be in a better position to preserve business continuity and product flow during unforeseen weather events or other uncommon events.
Once more, determining a baseline of supply chain indicators from previous years can be beneficial since it gives stakeholders historical information that they can utilise to estimate future inventory requirements and forecasts.
4. Increase Vendor Visibility
Understanding every aspect of your supply chain lets you find possible issues ahead of time. Ascertain your good visibility into all of your third-party vendors, including their financial condition and possible outside dependencies. Check significant credit rating agency publications on possible suppliers. Find technology that offers product and shipment visibility to keep yourself and your clients informed on projected delivery dates. Finally, before signing any contracts, you ought always conduct a comprehensive supply chain risk evaluation.
Constructing a due diligence lifecycle and procurement for your SCRM programmes; developing policies and procedures on the initial due diligence, the requirements of procurement, and a frequency, like annually, to evaluate vendors and third parties based on business operations-criticality. Customers can also have a periodic audit on the suppliers for further transparency and insight into their compliance, operations, security, and governance.
5. Model Worst-Case Scenarios
Such a resource should define what will happen with any company when the worst happens, a supply chain risk management system should also consider big data, predictive analytics, and data modeling to ensure that companies have all the details needed to simulate high-risk events in their associated effects. Using the nightmare scenario modeling enables companies to prepare lines of contingency, fallback, and communication workflows for how to proceed in the case of depriving disasters from actual damage done to life.
Like Tabletops: Exercises for - TTXs for likely events or 'scenarios' in which people respond as if they were at the scene of an incident define the future response activities of the organisation. They are defined by maximum breadth of coordination and immediate action.
6. Software Solutions Find
SCRM software puts any organisation ahead of the game because it sets out a way that allows visibility in the entire supply chain ecosystem the company operates in. A company will, therefore, be better able to understand its supply chain and thus quickly identify possibly weak areas and data-derived insights for improvement. After the company has suffered greatly, this solution may help it recover some flexibility.
Here, cloud-based software can generate company-wide efficiency while preparing for downtimes using various providers, redundancy, and shared data, with an endorsement from SAP. An additional use for SCRM software is providing total supply chain visibility, which allows managers and owners to easily spot unusual activity occurring on the supply chain. The upside is glaringly obvious when it comes to catastrophe, but it comes in handy during regular business days when leads are sourcing areas for improved efficiencies, cost savings, and profit increases.
What are the challenges of supply chain risk management?
The implementation of SCRM is not easy for firms, mainly because of the following reasons: The modern global supply chains are extremely effective in all stages from start to finish, making it almost impossible to track details closely.
If the company does not have reliable data of its own suppliers, it cannot assess risks fully and accurately. Many suppliers would not want to give such information on the pretext of protecting their identity and safeguarding their competitive advantage. If they accept to provide such data to identify all risks, many would not be willing to adopt new practices or even change old ones.
It also comes with budgets: new technologies, training, and hands-on monitoring require a financial outlay that, in some cases, may be far too great for small businesses. Since more people are involved in the process, a larger budget is required to be able to maintain due diligence on all of them.
Why is risk management important to the supply chain?
The supply chain, for most companies, is the main centre of their business. It enables companies to extract the raw materials that go into their production, as well as moving goods and services to the customer end. In other words, it is the fate of, or the life and death of, a company's income. Any breakage in the flow can impact that income unit in many ways.
This is the reason why appropriate risk management is so important to the supply chain. It should help one to identify prospective threats to supply chain efficiency, understand the various effects these threats may have, and be prepared with ready-to-implement solutions, being able to execute the same to maximise supply chain performance anytime a problem arises.