Risk management in the supply chain is a way to prepare for and prevent disruptions. It can help you identify and mitigate threats, but it's not simply a set of rules or regulations. In fact, a supply chain risk manager takes into account many factors and stakeholders including the supply chain itself, suppliers and vendors, customers, partners, and other external factors.
What is risk management in supply chain?
Risk is defined as the potential for loss. Risk management for supply chain is the process used to identify, assess and mitigate risks that can negatively affect a company's logistics and supply chain managment.
To take a step back, let’s answer the broader question: what is a supply chain? Supply chains are complex networks of suppliers, distributors, and customers that work together to produce a product or deliver a service.
In addition to managing the physical flow of goods, like gamma distributors, through your supply chain, you must also consider other potential disruptions such as cyber-attacks or natural disasters (such as floods). Other types of risks include:
- Regulatory compliance -- You could get into trouble with regulators if your supply chain is not internationally compliant.
- Supply disruption -- An interruption in the availability of raw materials can significantly increase costs and lower productivity.
- Quality control -- Poor quality products can reflect poorly on your brand image.
Risks for internal supply chains
Internal supply chain risks are any risks that are in your company's control. They can arise at every stage of your internal supply chain, including:
- Manufacturing risks – where something goes wrong during the production process, such as quality problems or late deliveries.
- Business risks – whenever poor planning and control affect your ability to meet customer demand, or when you do not have enough inventory on hand to meet sudden spikes in demand.
- Planning and control risks – this refers to inadequate forecasting and poor inventory management practices that lead to stock-outs and other negative consequences.
To mitigate these risks, businesses can implement several key strategies. First, optimizing production processes and conducting regular quality checks can minimize manufacturing issues and reduce defects in products. Second, implementing effective inventory planning and demand forecasting practices can ensure adequate inventory levels to prevent stockouts or overstock situations. Third, implementing robust planning and control mechanisms, such as production scheduling and material requirements planning (MRP) systems, can enhance coordination and visibility within the supply chain. Lastly, investing in employee training and development programs can enhance workforce skills and knowledge, leading to improved internal supply chain management. By adopting a proactive and integrated approach to addressing internal supply chain risks, businesses can strengthen their supply chain resilience and ensure smooth operations.
Risks for external supply chains
External supply chain risks are risks that come from outside of your organization. While the cause of the risk is out of your company's control, the symptoms can be overseen and fought by a logistic and supply chain management team.
- Demand Risks - The risk that the demand for a product or service will fall below expectations and cause losses to your organization.
- Supply Risks - The risk that suppliers do not deliver on time, which could result in lost sales, excessive storage costs, and unplanned expenditures like overtime labor or expediting fees.
- Environmental Risks - The threat of disruptions due to natural disasters such as hurricanes, floods, droughts, or earthquakes. These disruptions may affect an entire region or just one factory within it. For example, occasional floods in Thailand have caused severe damage to some factories but left others untouched; chemical spills due to accidents at factories have disrupted operations for multiple companies at once; specific manufacturing facilities have been destroyed by tornadoes (such as those that hit Joplin Missouri).
- Business Risks - Any event outside of a company's control – such as natural disasters – could disrupt its ability to operate normally because it relies on resources owned by third parties who might not be able to provide them during events such as hurricanes if they occur during harvest season when workers leave their farms temporarily.
To address these risks, businesses can implement various strategies. Diversifying the customer base and product portfolio can help mitigate demand risks by reducing dependency on a single customer or product. Additionally, establishing alternate sources of supply and maintaining strong supplier relationships can minimize the impact of supplier risks, such as disruptions or delays. Robust supplier qualification and monitoring processes can also enhance supplier risk management. Conducting thorough risk assessments of potential suppliers and regularly monitoring their financial stability, operational capabilities, and risk exposure can aid in proactive risk mitigation. Furthermore, incorporating environmental risk assessments and contingency plans, such as natural disaster preparedness and sustainability measures, can enhance resilience against environmental risks. By adopting a comprehensive and proactive approach to managing external supply chain risks, businesses can safeguard their supply chain operations and minimize potential disruptions, ensuring smooth and uninterrupted operations.
5 supply chain risk management strategies
A strategy for risk in supply chain management is simply an approach that helps you to identify, analyze and mitigate the risks associated with your business activities. When you have a clear understanding of where these risks are coming from, you can take steps to safeguard against them by putting more effective risk management strategies in place.
1. Increase visibility into the supply chain
As a business, you want to know that your supply chain is safe and reliable. To do this, you need to have visibility into the financial stability of your suppliers and vendors—as well as product and shipment visibility across the supply chain.
De-risking your supply chain is not always easy; however, there are some strategies that can help:
- Using a supply chain management system software such as Amplio to get better visibility into suppliers. This will allow you to make better decisions about whether or not they are viable partners for your business.
- Having strong supplier relationships also helps ensure the quality of products being produced on time for delivery at competitive prices.
2. Keep an eye on the supply chain's environmental risks
The second strategy for reducing supply chain management risk is to focus on the supply chain's environmental risks. In recent years, there has been much more emphasis on this aspect of risk management in terms of business operations and supply chains. Environmental risks are not just about the environment; they can affect the supply chain as well. For example, if a supplier fails to comply with local regulations regarding waste disposal or air pollution standards, it may lead to negative press coverage that damages your reputation and leads potential customers away from purchasing your products.
Additionally, environmental problems can affect profitability by increasing costs related to compliance (e.g., fines) or by disrupting operations because of natural disasters such as floods or earthquakes caused by climate change that destroy manufacturing facilities located near coastlines.
3. Implement the PPRR risk management model
There is a model for risk management called the PPRR model that can help you de-risk your supply chain. The PPRR model consists of prevention, preparedness, response and recovery. If implemented correctly, it will help you reduce your exposure to risk.
Implementing the PPRR risk management method effectively for supply chain risk management requires a systematic and proactive approach. First, prevention measures can be implemented by conducting thorough risk assessments to identify potential risks in the supply chain, such as demand volatility, supplier disruptions, or environmental uncertainties. Based on the risk assessment, mitigation plans can be developed and implemented, such as dual sourcing, safety stock inventory, or alternate transportation routes, to prevent or minimize the likelihood of risks materializing.
Second, preparedness measures can be implemented by establishing a comprehensive contingency plan that outlines the steps to be taken in case of a supply chain disruption. This includes identifying key stakeholders, establishing communication protocols, creating an emergency response team, and conducting regular training and drills to ensure readiness.
Third, response measures can be implemented by activating the contingency plan and executing predefined response procedures when a supply chain risk event occurs. This may involve quickly communicating with relevant stakeholders, assessing the impact of the event, and implementing immediate actions to mitigate the impact, such as rerouting shipments, reallocating resources, or sourcing from alternate suppliers.
Finally, recovery measures can be implemented by conducting damage assessments, identifying corrective actions, and implementing recovery efforts to restore normal supply chain operations. This may include working closely with suppliers and other partners to address disruptions, monitoring progress, and making necessary adjustments to restore the supply chain to pre-event levels.
Continuous monitoring and evaluation of the effectiveness of the PPPR risk management method, and making necessary adjustments based on lessons learned from past events, is crucial to ensuring its proper implementation for supply chain risk management. By following this comprehensive approach, businesses can enhance their supply chain resilience, mitigate risks, and minimize the impact of supply chain disruptions on their operations.
4. Leverage a logistics contingency strategy
A logistics contingency strategy is a plan for how you'll handle disruptions, including the use of alternative transportation modes, warehousing services, and other resources. Successful implementation requires a thorough understanding of your supply chain network and its vulnerabilities. You will naturally develop a contingency strategy while creating a PPRR plan, but it's worth calling out the importance of contingency plans separately.
Contingency plans are all about being able to respond to something that goes wrong. In the PPPR model, you'll plan for how to make things go right with prevention and preparedness measures, but your response and recovery plans are all about what to do when something goes wrong. Things always go wrong - so the contingency plan will always help you get out of tight situations.
When implemented correctly, a logistics contingency strategy will:
- Reduce risks specific to the types of products being shipped
- Improve delivery times during crisis situations
- Minimize losses in case of an emergency or natural disaster
5. Invest in a software solution
Software solutions can help reduce risks, improve visibility, increase efficiency and reduce costs for your supply chain. In addition to these benefits, they can also help improve customer satisfaction and retention.
Amplio predicts and mitigates component shortages for hardware manufacturers by improving visibility into their supply chains. If a component is predicted to be unavailable, Amplio’s marketplace surfaces the best available alternatives—including those parts trapped in excess inventory—to minimize disruption to production schedules or product availability for customers who rely on those components.
De-risking the supply chain is essential in 2022
Supply chain risk management is an essential part of any supply chain, whether it’s internal or external. By understanding the risks that exist in your supply chain and taking a proactive approach toward managing those risks, you can ensure that they don’t impact your business negatively.