How You Can Manage Supply Chain Risk

The globalization of manufacturing in the 1990s, highlighted by the meteoric rise of manufacturing in China, marks the inception of the modern world’s large, complex supply chains. Since then, global companies large and small, have 100s and sometimes even 1000s of suppliers across countries and continents for sourcing raw material, components or contract manufacturing.

Read here: A Small Guide to Identify the Right Suppliers for your Business

While this has undoubtedly led to expanded sourcing opportunities, a wider reach to new customers and new markets, it has also posed multiple challenges. Together these challenges are commonly referred to as Supply Chain risk.

What is Supply Chain Risk?

At its simplest, Supply Chain risk is the probability of failure of inbound supply due to a variety of reasons leading to the inability of businesses to meet customer demand in the decided timeframe.

Types of Risks

As global supply chains have grown in length and complexity so has risk. Faced by the imperative to seize the next levels of cost savings, process efficiencies and service delivery, businesses rely on more extensive sourcing activities. As a result, product and service procurement is being managed with multiple organizations, in diverse countries, with varied jurisdictions across the world. When organizations do not pay close and continuous attention to their supply chain risk management practices, they make themselves vulnerable to crisis and lose out on reaping benefits from global supply chains.

The risks they can face include:

  • Social, Ethical and Environmental Risks: When supply partners deploy child labor, follow poor and unsafe working conditions, or abuse natural resources, they expose partner organizations to social, ethical, and environmental risks and non-compliance with several standards established by the authorities globally
  • Financial Risks: Volatility in energy prices and exchange rates, unpredictability of raw material costs, and inaccurate billing by a supplier can expose organizations to financial risks
  • Operational Risks: Businesses can also be exposed to operational risks when its suppliers compromise on food safety standards, fault with demand planning, compromise with quality standards, or fail to deliver quality products on time
  • Continuity Risks: Some risks that suppliers can expose businesses are completely outside its control like financial breakdowns, natural disasters, terrorist attacks or ill-health of personnel due to public health crises on the suppliers’ side
  • Strategic Risks: Organizations are also vulnerable to strategic risks when its suppliers fail to deliver services on time due to fraud, substandard working conditions, IP infringement, or geopolitical shifts such as Brexit that impact regulatory requirements

Also Read: 6 Technologies Shaping the Supply Chains

Risk Assessment Framework

Having a risk assessment framework provides businesses with a 360-degree view of their supply chain to manage the risk from end-to-end. Organizations can draw up such a framework by:

  • Identifying different types of risks
  • Assessing risk severity
  • Prioritizing and segmenting risks that call for immediate action
  • Planning mitigation processes
  • Managing the planning process around either mitigation or contingency
  • Regularizing end-to-end risk assessment

What can Importers do to Mitigate Supplier Risk?

As an importer it is vital to have visibility over supply chain operations. This is the only way companies can effectively control their environment and proactively lower the incidence and severity of risk.

This can be done in two ways — by focusing on reducing risk or focusing on preparing back-up plans in the event of an unavoidable calamity due to natural disasters, political unrest, or global crises.

To reduce/eliminate risk companies can undertake:

  • Contract Planning: Leadership should require suppliers to provide details of their sourcing and offshoring agreements
  • Supplier Assessment: Organizations should ensure supply chain partners comply with relevant regulatory requirements
  • Close Ties with Suppliers: Keeping a close relationship with supply partners can help reduce many risks by fostering mutual trust and thereby improving productivity and efficiency
  • Offer Training: Businesses can further strengthen ties with suppliers by providing relevant training and ensuring relevant skill-set training of those involved in the supply chain

For situations when a set of risks cannot be mitigated, companies can undertake contingency

planning. This would require a focus on:

  • Disaster recovery planning
  • The maintenance of a list of alternative suppliers
  • Flexibility to find new suppliers
  • Flexibility to substitute products
  • Working with suppliers to recover from an emergency situation
  • Pausing operations

Embracing Tech in the New Normal

Companies can improve their risk management practices and bolster resilience in the new normal by focusing on implementing new supply chain technologies like AI and IoT to:

  • Improve visibility of relevant data: When smart tech collects information about weather patterns, traffic conditions and container transfers, it provides firms with a detailed oversight into supply chain visibility that improves efficiency and streamlines operations. This also help businesses predict the potential of a grave risk incident well in time and thereby help avert its occurrence
  • Enable real time tracking of shipments and storage conditions: Technologies like IoT enables companies to track products along the supply chain and provide vital information into possible inefficiencies that can be quickly corrected by shippers. Real time insights enable firms to gain speed and agility to pivot operations when required
  • Allocate resources to protect against vulnerabilities like fraud: Fraud Tracking using AI can introduce layers of security in every transaction thus shielding firms from the dangers of phishing and fraud

Using this risk assessment framework and mitigation techniques, you can predict and reduce the risk in your supply chain which will help you align your business better.

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