Supply Chain risk management – Proactive Approach

As we stand at the end of 2020 and look back, the changes and improvements in the global economy and supply chain are unreal. With the development of information technology and global internet connectivity, the world has literally become a single market. Now it is easy to establish trading relationships between any two points on the world map. Supply chain Networks has grown into a very complex and interconnected entity. As the complexity and area of coverage of the Global Supply chain widens, so is the new kind of risks associated with it. The pandemic COVID 19 has shaken the global economy and supply chain in an unprecedented manner. Even though the economy and supply chain is on the way to recovery, this incident has revealed many unnoticed weak points in the supply chain process. So, it is high time that we follow strategic steps to identify, assess, and mitigate the risk in the end-to-end supply chain operations. While discussing Supply Chain Risk Management (SCRM), there are two major categories of risks.

• Known/identifiable risks
• Unknown/Unprecedented risks

• Known/identifiable risks: Known risks are the risks which can be identified and recorded over time. For instance, a supplier who could go bankrupt and disrupt the supply is an example for the identifiable risk since this threat can be identified beforehand by studying the supplier’s financial history. Possibility of employee strikes, wars etc., are other examples. To handle known risks, we can follow a commonly adopted method of risk management cycle. Risk management cycle involves 3 phases:
  • Risk identification: To face a risk, we should make sure that we know about the risk. So, the first step is to identify and establish all the weak points in the supply chain. The identified risk profiles should be monitored continuously to be up-to date with our risk mitigation strategy. Parameters like purchasing volume, effect on sales, scarcity, technology and patents, ownership structures, custom requirements and geography etc., can be taken into consideration. For instance, a particular raw material which has only single supplier is a risk which needs to be identified and kept under radar.
  • Risk Assessment: Once the potential risks are identified now it is important to categorize, assess and establish the weightage of each risk depending on its probability of occurrence and impact of the risk. To facilitate classification and definition of individual risks, it is important to create clusters by topic, such as supply disruption risk, market cost risk, economic stability of the suppliers. Also, it is useful to consider not only the supplier perspective but also location risk such as natural disasters strikes and accidents at sites or logistics hubs—which can often affect several suppliers at once. Industries can adopt data driven methods suitable for their mode of operations.
  • Risk Mitigation: Now that we have identified and made assessments about the risks, it is important not to get off-guard at a real time risk event. To facilitate a smooth escape from the risk event it is necessary to establish a set of pre-approved preventive and reactive measures. These steps are important as they provide basis for addressing risk in a proactive manner and helps to initiate appropriate measures for a long-term success. The action plans for such events should be documented and should be made available to all the employees.
• Unknown/Unprecedented risks: These are the risks which are impossible or very difficult to predict. Risks like natural calamities, terrorist attacks, cyber security vulnerabilities, personal mistakes and oversights etc falls in this category. For unknown risks reducing their probability of occurrence and increasing the speed of recovery in unfortunate events can be achieved through building a risk-aware culture. The key attributes of a risk-aware culture are:
  • Acknowledgement: Managers and employees should feel free to pass bad news or lesson from mistakes. The culture should be such that instead of pointing fingers, the crisis should be solved more harmoniously.
  • Transparency: Leaders should clearly define the risk tolerance benchmark of the organization. Everyone in the organization should be aware of their dos and don’ts.
  • Responsiveness: Employees should be given the feeling of ownership so that they respond to potential crises proactively.
  • Respect: Both employee’s and organizations perception towards the risk should be same. So that employees would not take risks to save their benefit which might harm the organization.

We help organizations with tailormade supply chain solutions, covering various aspects such as Inventory Optimization, Supply Risk Mitigation, Procurement Cost Reduction, Spend Analytics and many more. Our solutions deliver strategy for sustainable business environments and better ROI. Talk to our Supply Chain Specialists today!