As defined by the ASCM Supply Chain Dictionary, supply chain risk management (SCRM) is the systematic identification, assessment, and mitigation of potential supply chain disruptions with the objective of reducing their negative impacts on the supply chain’s performance.
The primary goal of supply chain risk management is to anticipate and prevent any potential problems from negatively affecting the overall supply chain performance.
The three main phases of supply chain risk management are:
Risk management plays a crucial role within the supply chain. For many companies, the supply chain is the core of the business. It ensures the proper flow of raw materials for manufacturing and efficient delivery of goods and services to customers, which makes the supply chain entirely responsible for maintaining a company’s revenue. Any disruption to that flow can negatively impact the business on many levels.
That’s why proper risk management is so incredibly important to the supply chain. It helps us identify potential threats to supply chain efficiency, understand the various impacts of these threats, and be sufficiently prepared with at-the-ready solutions that can be immediately deployed to maintain optimal supply chain performance, if and when a problem occurs.
Over the years, research has indicated that the majority of risks to overall supply chain management success can be categorized within the following four (4) pillars:
Risks to your supply can occur internally or externally as a result of disruptions to your source materials, product manufacturing, or flow of goods from point-to-point within the supply chain. Aspects of the supply chain that may be affected include transportation, lead times, pricing, and inventory.
Unfortunately, demand risks can be entirely unpredictable as they are often dependent upon customer behavior. This area of risk may directly affect promotions, pricing, and can lead to bankruptcy and other related losses.
Process risks can be either known or unknown risks. Known risks involve manufacturing yield, receivables, payables and capacity, while unknown risks involve technology (like a cyberattack) and unforeseen disruptions to the supply chain. Process risks can be minimized through proper risk assessment and evaluation.
This risk collectively combines political conflicts, exchange rates, and environmental regulations with weather-related “Acts of God”, such as hurricanes, earthquakes, tsunamis and other natural disasters, many of which can be unpredictable.
Within the four (4) pillars of supply chain management risks, the following are the threats supply chain managers deal with most often. Additionally, many of these threats are interconnected, with one risk inevitably leading to another:
Any natural events that may affect your supply chain, such as weather related incidents and natural disasters (this can lead to port, airport, and road closures), and more recently, pandemic issues.
These can include shifts in demand, port and border delays, currency fluctuations, material shortages, and price volatility. Economic risks can be a byproduct of other risks, such as Environmental.
These can be global or local, and include protest movements, political unrest, corruption, trade restrictions, tariffs/sanctions, terrorism, and pirating.
Ethical risks include supply chain threats caused by human rights and labor conditions, safety issues, criminal behavior/fraud, cybersecurity, and scandals. Ethical risks can also be considered Environmental if they involve a company’s neglect of sustainability practices.
Initiate a proper risk management plan is important, but where do you start? The following tools and strategies will help you create a plan that effectively protects your supply chain:
Often people within the industry use the terms supply chain risk management (SCRM) and supply chain resilience interchangeably, when in reality, they are quite different.
Risk management focuses on the negative––the risk and the damage it can cause. There’s an urgency to call it out, contain it, and control the environment. Resilience, however, focuses more on the positive, the path forward, and the opportunities created by being prepared to handle these potential threats.
While both are critical to the success of the overall supply chain, resilience requires strategic thinking and proactive planning that can make a company more competitive in the long run, affecting market share, and brand and shareholder value. A resilient mindset asks, “How can we turn this risk into a competitive advantage?” and “How can we pivot quickly to gain market share?” In the end, building a more resilient supply chain will result in less potential for risk.
Along with the proper tools and strategies, following these best practices will help you secure your supply chain from potential risks and mitigate any potential damage from threats:
Once you’ve decided to implement a supply chain risk management process within your company, you may encounter a few of these challenges along the way. Understanding what may lie ahead will allow you to be prepared with the appropriate strategies:
The following links provide more in-depth information on other supply chain topics:
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