The Importance of Supply Chain Risk Management

in Business

Significant technological interruptions to the global logistics sector can cause difficulties in building optimized supply chain strategies. Also, they can drastically affect your company’s revenue, cut into its market share, send costs soaring above budget, and threaten real-time production and distribution. It’s impossible to sell goods if they cannot be manufactured or delivered.

These sorts of disruptions can adversely affect your company’s credibility with clients, investors and stakeholders, and send capital costs rocketing.

The biggest risk to revenue disruption

A recent study that was carried out involving over 600 top financial executives, cited supply chain disruption as being the greatest potential risk in terms of disrupting revenue. Not only that; it has also been posited that significant supply chain failures can take at least two years to recover from. In light of this information, supply chain risk management is therefore not only justified, but is intrinsically essential. This is why any supply chain strategy must include the part about possible risks and ways to minimize them.

The big question to consider of course is how supply chain risk management can best be implemented. In order to come up with an answer, the first thing that must be done is to identify and understand the risks, and to highlight the critical points wherein problems could occur and cause disruption. Once this is done, appropriate mitigating countermeasures can be considered and, where appropriate, be put in place.

Complex supply chains necessitate complex supply chain risk management practices

The more complicated the supply chain, more comprehensive any risk management solutions must be. The more vertically integrated a business’s production structure is, the more control it has over the various elements. Back in the early 1930s, Henry Ford’s production plant in Dearborn, Michigan, USA, owned its own forests, its own glass works, its own railway lines, and even its own rubber plantations in Brazil.

Another feature of the production economy at that time was that production took place on a localized basis and in the main was sold to more localized markets.

As companies have become more dependent on raw materials and services from around the globe, and for most businesses not having Henry Ford’s ability to have so many of the components of their supply chain in-house, the risks of potential disruption have become exponentially larger.

The changing supply chain paradigm

As globalization began to establish itself in the 1980s, with the sourcing of more products and raw materials from the cheapest sources around the world, the supply chain paradigm began to change. Companies began to adopt new methodologies like the Toyota motor Corporation’s “Kaizen” philosophy, introducing just-in-time and other lean manufacturing systems. Global sourcing based on these “lean” strategies became an accepted concept.

The advent of the World Wide Web and the development of e-commerce, all added to a potentially false feeling of security. The immediacy of the flow of information, particularly where procurement systems became electronically linked, encompassing everything from the sales process to the supplies manufacturing processes and shipping, can lead to companies thinking they are in control of the complete supply chain process. The reality is that they’re only in control of the information. The actual physical supply chain can still be disrupted; it’s just that we know that the disruption has occurred that much sooner.

The types of threats global supply chains face

With supply chains being as large and globally convoluted as they now are, threats can come from every which-way. They can be political, currency based, and/or the result of cyber attacks. They can be torn apart by “acts of God” and affected by acts of terrorism. These are of course in addition to the more commonly faced risks of premises catching fire, power grids failing, or equipment breaking down.

Prevention is better than cure

It is often said in relation to illness and disease, that prevention is better than cure. The same philosophy can be applied to supply chain disruptions. In other words, the best way to deal with them is to prevent them from happening in the first place. In the same way that companies use Six Sigma to prevent quality problems, a similar philosophy and methodology can be used soon to significantly reduce the potentiality of supply chain disruption.

In terms of fire prevention for example, companies have learnt to adopt strategies to regulate the storage, use and disposal of certain inflammable materials. They introduce smoking bans in the workplace and ensure that equipment is well maintained in good order. Having done this themselves, these companies must now extend the same disciplines to their suppliers along the supply chain.

Sound business decision making

In deciding where they will set up business, most companies take various things into consideration such as the availability of an adequate local labor force, the proximity of raw materials, access to good transport networks, and the absence of flood and storm risk etc. When looking for suppliers to populate their supply chain, and introduce supply chain risk management, companies should therefore countenance other companies who have followed a similar philosophy. The same can be said for health and safety standards too.

Many companies have remodeled their supply chains by outsourcing to countries such as China, Hungary, India, and other developing countries. They are attracted by the cheap labor and raw material costs, all and sometimes let these outweigh the higher potential risks of natural disasters such as tsunamis and hurricanes; the risks that lower health and safety standards bring to bear, and the potential hazards of dealing with suppliers hailing from countries that have unreliable legal systems.

Weighing risk against reward

The important thing when considering sourcing from such countries is to carefully weigh the risk against the reward. Where risks seem particularly high, companies then need to look for ways of preventing or controlling the things that could go wrong. It is the basics of good supply chain risk management.

There is a tendency for companies to be concerned about experiencing major catastrophic supply chain disruptions. Whilst these can of course have disastrous results, so too can an ongoing chain of smaller disruptions. Suppliers being constantly late in meeting delivery targets, and retailers routinely having empty shelves can also lose a substantial amount of business and brand loyalty. In other words, customer satisfaction must be taken into consideration as well when mitigating supply chain risk.

Global supply chain – a double edged sword

Globalization is actually a double edged sword. As well as presenting certain risks as outlined above, on the other side of the coin it provides us with a chance to manage those risks. By evaluating the risks carefully and making informed decisions, we can make safer choices that are more likely to strengthen global supply chains. In addition, the very act of introducing these suppliers widens the choice for all buyers.

It also provides buyers with an opportunity to spread risk. By splitting sources and using suppliers manufacturing the same products in different countries, it means that while one supplier in say Thailand, might be knocked by a tsunami, the other suppler in China can continue production unaffected. The same logic in decision making can be used in relation to many resources and potential interruptions, including things like power grids, transport strikes, acts of terrorism, political unrest etc.

Continuity planning

It may never be possible to completely mitigate for a catastrophic failure. Understanding this is half the battle. The other half is creating a contingency plan to manage in the event that a total breakdown does occur. As well as having a continuity plan, businesses should also take out insurance.  Insurance may not repair the damage to the supply chain, but it can tide businesses over for a limited time to allow the supply chain to be repaired and rerouted.

Supply chain risk management will add cost to any supply chain. That is unavoidable. Hopefully, the safety mechanisms that are built in will never be needed. However, if they are never implemented in the first place, the fall-out could be far more catastrophic. They could even prove to be irrecoverable.

The potential benefits of supply chain risk management outweigh the costs

In the end result, when all things are taken into consideration, the potential savings of implementing supply chain risk management far outweigh the costs.

Image Credits: chuttersnap

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