Supply Chain Risk Management is a strategic approach to an enterprise, identifying risks within the supply chain, assessing and mitigating them to ensure business continuity and competitive advantage. It is increasingly done by many companies with a devoted supply chain risk analysis and/or an entire supply chain risk management within a supply chain risk manager. They typically involve a supply chain risk management plan, developing a supply risk management strategy, and a global supply chain risk management strategy considering internal supply chain risks and external supply chain risks. Part of these plans also includes a search for a supply chain risk management provider or other supply chain leaders knowledgeable about capacity risk in a supply chain, as well as overall global supply chain risks. Effective supply chain risk management will also address vulnerabilities in the communications technology that could apply against cyber threats that can impact both revenue and reputation.
Definition of Supply Chain Risk Management
Supply Chain Risk Management (SCRM) refers to the systematic process for identifying, assessing and prioritising risks to the supply chain of an organisation and the strategies to manage these risks, thereby ensuring that the business remains ultimately solvent and profitable.
Supply chain management is advantageous for a company not only as a measure against unforeseen events but also as an opportunity to develop both resilience and efficiency in the supply chain. As global supply chains become ever more complex and integrated, practices in effective supply chain risk management become increasingly important.
What are the advantages of supply chain risk management?
Improved resilience is the most noteworthy of the benefits of SCRM. By identifying potential risks and creating contingency plans, a company can not only prepare for and react to unexpected events but can also secure the supply chain across its entire operations. Thus, continuity of operations is ensured, as well as the ability to meet customer demands and their competitive edge.
Effective SCRM may lead to cost reduction by detecting areas of waste or inefficiency in the business. Optimisation of inventory levels gives rise to reduced carrying costs and risks of stockouts. Similarly, transportation costs and delivery times are improved by avoiding waste in routing logistics processes.
A costly recall and liability can be averted by ensuring that suppliers comply with quality standards and regulatory requirements since this will shield a company's brand from any discrediting while allowing consumers to enjoy high-quality products and services from retailers.
It is very beneficial to recognise and address potential problems as they arise so as not to deter negative publicity from the company brand and its relationship with the stakeholders. Increasingly, corporations are applying practices of corporate social responsibility and seeking to attain their goals in environmental, social, and governance (ESG) pursuits. Supply chain risk management provides the best opportunity for enhancing sustainable practices by controlling the environmental impact of all aspects of the supply chain.
Steps in the Supply Chain Risk Management Process
The British Academy for Training and Development offers a supply chain management process programme, which is beneficial for attendees to gain knowledge of the process of supply chain risk management. The supply chain risk management process involves systematic steps to identify, assess, and mitigate potential challenges. They are as follows in brief:
Risk Identification: Identify the possible internal and external risks affecting the supply chain.
Risk Assessment: Assess the impact and likelihood of identified risks, ranking them based on the severity of their consequences.
Risk Mitigation: Formulate strategies and actions to reduce and include the long-term effects of the prioritised risks.
Implementation: Implement the strategies, keeping those in line with the overall company objectives.
Review and Update: Review the current risk environment periodically, evaluate the effectiveness of the previously implemented strategies, and amend them if necessary.
Risks that may affect supply chain operations
Natural calamities, geopolitical events, supplier bankruptcy, product quality issues, cyber incidents, and more all pose internal and external supply chain risks.
1. Natural events
Natural disasters such as earthquakes, hurricanes or floods could easily turn supply chains upside down. So will political and economic events, such as war and geopolitical instability, trade disputes, strikes, and fluctuations in anything from currency valuation to fuel prices. Risk management processes ensure that the contingency plans are in place to mitigate the impact of such events.
2. Supplier risk
All challenges can be resolved through a healthy supplier relationship within the supply chain. Any weakness in a supplier's financial or capacity constraints or another issue will jeopardise such an association. Companies working with such suppliers may be forced to pursue diversification in their sources or alternatives for keeping a smooth supply of materials or components.
3. Cybersecurity threats
Supply chains are especially becoming victims of cyber-attacks due to the increasing use of digital systems and communication technologies to manage orders, inventory, and distribution. Ransomware attacks and malware can halt production and backlog distribution and become costly matters. Breaches in sensitive data of the supply chain may expose trade secrets or customer data, causing reputational damage and legal implications.
Cyberattacks can disrupt transportation and logistics, destroy critical infrastructure, steal intellectual properties, produce counterfeits, or commit financial fraud. SCRM examines vulnerabilities in digital systems and data privacy and aids the organisation in creating a security plan and response.
4. Demand fluctuations
More rapidly changing and erratic is consumer demand: changing needs, evolving preferences, and increasing options. An accurate demand forecast will have significant implications for a company's profitability, which calls for risk mitigation through optimum inventory levels and flexibility in production scheduling and distribution channels with reference to variable demand.
5. Ethical and social responsibilities
Visibility into the supply chain is essential to identify unethical practices concerning human rights, labour violations, and the environment. Wrongful actions by a supplier, as defined by international regulations or company values, may warrant repercussions to the company itself. Risk management in this area entails due diligence concerning the appraisal of practices throughout the supply chain and thorough consideration of alternatives.
Why Is Supply Chain Risk Management Important?
Effective SCRM is good business practice. What risk management in supply chain optimisation truly stands for is finding efficiencies, reducing costs, and mitigating vulnerabilities. If done right, supply chain management finds the most lean and least expensive supply chain approach for your organisation within your level of risk tolerance. It is imperative to perform a thorough risk assessment because, in today’s business world of just-in-time, if any link of the supply chain is disrupted, it means heavy costs in time and money.
Remember that risk management is basically about asking, “What could go wrong?” and applying an appropriate level of risk mitigation to those different scenario possibilities. Prevention is always better, and preventing supply chain disruptions is the principle behind SCRM. In times when supply chains are disrupted, such organisations with strong SCRM programmes are ideally supposed to already have pre-mitigation strategies to facilitate their decision-making.