Decoding Supply Chain Risk Management
What is Supply Chain Management?
Supply chain management is a combination of processes that ensure seamless delivery of goods or services from production to consumption. It is undeniably a very critical component of business operations. Ensuring that it runs without any disruptions is crucial for companies.
It is not uncommon for supply chain disruptions to occur due to human errors, system failures, or natural disasters. In a globalized world, supply chain disruptions are often spread across countries and, therefore, beyond the purview of companies.
SCRM (Supply Chain Risk Management) deals with the management of risks associated with the supply chain and of late it has become a top priority for organizations around the world. According to a survey conducted by the Business Continuity Research Institute, supply chain disruption has doubled in priority compared to other enterprise disruptions, with 48% of respondent companies being concerned or extremely concerned over the issue. The survey results also showed that 14% of respondents had suffered from supply chain disruption losses of over €1 million.
Risks Inherent in Supply Chain
Given the overarching role a supply chain plays, it’s necessary to identify and understand its associated risks that can put a spanner in the works of business operations. Here’s a brief overview of the common, and somewhat traditional, supply chain risks that have been witnessed time and again, reiterating the need for supply chain optimization.
Financial risks can be due to budget overruns, funding constraints, inflation, and the inability to reach milestones, which necessitates additional funding to make up for the shortfall. These risks, in turn, can be caused by an unexpected or unfavorable change in foreign exchange rates, trade sanctions, changes in work conditions that affect the successful completion of projects and supplier bankruptcy. A solid investment plan that guarantees adequate ROI, complemented by thorough market research, can provide a sufficient buffer against financial risks.
A company’s reputation is at stake if it is unable to maintain good long-term relations with suppliers/partners and frequently changes vendors in search of the lowest prices. The root cause of this problem is the ability, or lack thereof, to build trust with suppliers and partners. To do so, clear contractual obligations must be drafted, which satisfy all the stakeholders involved.
Accidents and Environmental Risks
Factory fires and damage to machinery caused by human error and natural disasters can halt processes for long durations, affecting production and supply. While any disruption caused by human error can be mitigated or prevented by effectively monitoring processes and adopting the latest technology such as wireless sensors and GPS tracking, there’s no control over the problems caused by natural disasters to a large extent.
For instance, in the year 2011, Japanese company Toyota witnessed complete supply chain disruption caused by a devastating earthquake, halting its operations with 75% of the company’s profit washed away.
The occurrence of natural hazards arising due to climate change has made supply chain management increasingly difficult, and companies have been coping with the aftermath of storms, tsunamis, and earthquakes. Having said that, disaster-preparedness can help mitigate the disruptions caused by floods and earthquakes. This can be achieved by gaining visibility on your processes and building an efficient supply chain.
Predicting human behavior in critical situations is difficult, which may lead to bad business decisions. Forecasting customer demand, gauging market factors, economic situations, and political climate, before entering the market requires thorough understanding and robust planning. Moreover, companies must also realize that supply chain risk management won’t be achieved by merely setting up processes and governance models and that effective change requires creating awareness about probable risks across the organization. A critical aspect of this issue is molding organizational behavior to maintain active lines of communication with suppliers.
Causes of Supply Chain Risks
While the traditional causes of supply chain risks remain valid, companies today show a marked shift in their concern for workflow disruptions arising out of war and data breach. According to data provided by SCM World’s 2017 Future of Supply Chain survey, SCRM (supply chain risk management) for most companies, is now focusing on disaster scenarios created by terrorist attacks, cyber warfare, theft of intellectual property and large-scale damage caused by unprecedented natural hazards that are the outcome of climate change.
Terrorism has gone beyond state attacks to damaging oil pipelines, trade convoys or arterial roads and railways. The cyber attack has turned into a useful and low-cost means of causing large-scale and often irreversible damage, especially as big data has become the lifeline of many industries.
Next, increasing geopolitical conflicts have disrupted supply chain operations as countries are resorting to trade blockages or exorbitant tariffs to pressure each other. In some situations, supply chains have been broken altogether due to ongoing wars as evident in the conflict-ridden countries of MENA (the Middle East and Africa).
Mitigating Risks with Supply Chain Optimization
It is thus evident that increasing international trade linkages and digitization of business have created a set of risks that require newer and prompt responses. The following are a few essential rules that supply chain management teams must ideally adhere to, for building a robust and efficient supply chain:
Supply chain structures should be based on a practice-driven operational model that can quickly respond/adjust as per the market and economic conditions.
Proper infrastructure for sharing information and appropriate communication tools should be used among relevant parties.
Big data analytics should be used to generate meaningful insight that can help in making quick decisions keeping in view market trends.
Leaders must follow a clear strategy to build an efficient supply chain with available resources.
No company can avoid or eliminate risks. However, an in-depth understanding of operations and effective supply chain optimization can help organizations minimize risks. Companies should invest in SCRM (supply chain risk management) capabilities that enable them to effectively monitor their supply chains in real time so that they can identify potential threats and respond suitably before any problem arises. Building a strong supply chain risk mitigation is not just a way to increase ROI, but also a means to secure a competitive advantage in a globalized economy.