Risk Management Blog - ClearRisk

Supply Chain Risk Management: Balancing Flexibility and Vulnerability

Posted by Craig Rowe on Tue, Oct 6, 2009 @ 15:10 PM

Supply chain management is largely about interconnectedness. When planning for and managing the sourcing, procurement, conversion and logistics related to your product offering, companies need to create the right relationships with the right companies. This will help to optimize the movement and storage of materials and inventory while at the same time preparing for disruptions. Striking the right balance is not easy.

If you stretch your supply chain too thin, you subject it to vulnerability and leave room for disruption in your operations. If you don’t actively seek ways to improve your supply chain and its processes, you’re missing out on the ability to make related operations run more effectively and efficiently.

Globalization and new market realities that allow just-in-time manufacturing, outsourcing and lean manufacturing have further complicated supply chain management. While it brings great opportunity to companies big and small, it also brings considerable risk. If you do it right, a flexible and optimized supply chain can not only free up resources within the organization, but it can also decrease the cost of goods and increase the number of markets that you can occupy. However, mismanage your supply chain, and a disruption can decrease revenue and market share, and can increase costs considerably.

When one of the links in the chain fails, what do you do?

Yossi Sheffi‘s book ‘The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage‘ shows us that it is a balance between increasing security and boosting resilience that will help reduce disruption and help in building the ability to bounce back quickly. Managing the risks associated with your supply chain should be a task that closely relates to your business continuity planning and disruption management. Any size disruption in the chain can upset revenue on a large scale if you aren’t prepared to make alternate arrangements. Proactively managing your supply chain risk begins just as any other risk management planning begins:

  • Identify your risks: It’s crucial to understand your supply chain risks and recognize where and how they have the potential to interrupt the chain. Look for vulnerabilities such as bottle necks where only one supplier is used.
  • Prioritize the identified risks: Based on their potential frequency and severity, prioritize your risks according to the impact they could have on your supply chain. As with other risk management planning, this will give you an indication of where your efforts should begin. If a crucial component is manufactured in India and you have no back up suppliers, a fire in their plant could put you out of business. This would be a good place to start!
  • Develop a strategy of how you will manage these risks: Your strategy should outline what policies, procedures, structures and formalization will mitigate the risk in your supply chains. Look for alternate suppliers before you need them and consider using several suppliers if for no other reason than to mitigate the disruption risk.
  • Implement and execute the plan as necessary: You may put policies and procedures in place and never need to use them, but if a disruption occurs, they will pay off in spades!
  • Monitor and evaluate your use of the plan: Analyze your plan’s implementation and any execution of the plan to identify what worked well and what didn’t. Alter the plan accordingly so that you are better prepared should another disruption occur. As with any emergency or contingency plan, frequently update and exercise your supply chain risk management plan

Insurable risks like fire, accounts receivable and employer liability should be important to your supply chain risk management, but don’t forget to consider the non-insurable risks as well. Preparing to manage strategic risks like company and brand reputation and regulatory compliance should be part of your supply chain risk management plan.

photo via user hoefi at sxc.hu

Topics: supply chain risk management, identify risks in supply chains, supply chain risks, develop strategies for supply chain risks