85% of surveyed global chains experienced at least one supply chain disruption risk in 2017. Deloitte has shown that organizations who proactively manage supply chain risk spend 50% less to manage disruptions.
As always, proactive risk management is more cost efficient than reactive action. An efficient supply chain is essential for the production of quality products and effective customer service.
Supply chain management involves many changing factors.
Of course, there are natural disasters, supplier changes, and system updates, all of which may inhibit one or more links of the supply chain. But risk managers must also keep on top of regular changes in supply and demand in rapidly growing (or shrinking) industries.
The latest trends involving outsourcing and lean manufacturing make effective supply chain management even more crucial. External political factors such as the recent tariffs and impending “trade war” and their impact must also be considered. (For a thorough analysis of the business impact of the Trump tariffs, read this article by Risk Management.)
To manage supply chain risks, managers can do the following:
4 Ways to Manage Supply Chain Risks
It’s important to understand each link in the supply chain and how goods and resources flow from one point to the next. Where do inputs come from, and how far away are they shipped? What types of organizations are necessary for production and which depend on outputs?
The risk manager must consider the risks associated with each area and organization, as some may bring more uncertainty than profit.
For example, outsourcing from a politically unstable country for the sake of cheaper materials is more likely to create more problems than benefits. All partners should be thoroughly vetted before beginning a relationship: consider their reputation and the likelihood they’ll follow through on contractual terms. An effective way to do this is to consult with references who have worked with the organization in the past. They’ll be able to provide proof that trade will likely proceed with no issues or warn that contract terms may be breached.
As in any type of risk management, prioritization is key. First, determine which suppliers are most at risk because of their location, organization-type, or other organization-specific concerns. Then, risk managers should determine which are the most critical. Consider which suppliers contribute to the projects that create the most revenue or which, if there was a disruption, would impact the largest number of products.
This analysis is another method of looking at the frequency and severity of a risk, which is central to the main risk management process. The suppliers that present the most risk, or those that are most likely to negatively impact the supply chain a significant amount, should be addressed first. There are too many risks to handle at once so direct the most resources, including employee time and money, towards mitigating these.
For more details on risk frequency and severity, read our blog post The 5 Step Risk Management Process
After deciding what areas require attention, it’s time to take action. For all crucial areas of the supply chain, think of likely scenarios that could impact the ability to deliver. Some examples are material shortages, weather, political troubles, or simple human error.
It may also be helpful to consider unlikely scenarios that have the potential to cause a huge impact. While these “black swan” events may never be truly predictable or understood, having several plans in place will make it easy to adapt one slightly to fit a current situation.
At this stage in the process, it’s valuable to ask different stakeholders for input as they may illuminate areas that were not previously considered. For example, an employee in the warehouse will likely have a different perspective on probable risks than an executive in the home office.
Train employees on the appropriate response to multiple scenarios. Encourage them to ask themselves “what if?” at every stage in the supply chain. This will make it easier to improvise when an unexpected event arises. Practicing and testing employee preparedness for scenarios can also be used as a point of analysis to determine where further improvement is needed.
Determine an action plan for each situation. For example, if an input is delayed or disrupted, managers should quickly organize a replacement or change production schedules. If there’s an issue with an outgoing shipment, employees can quickly shift to damage control and explain to customers exactly what went wrong and what is being done to fix it. Formally document this procedure, educate employees, and practice.
3. Strengthen the supply chain
One of the easiest ways to reduce supply chain risks is to lessen dependence on any one link. Diversify the links of the supply chain, so a disruption in one supplier won’t have an extreme impact.
For example, a risk manager could arrange to have 50% of metal input come from one area and 50% from another. Similarly, they may have a waitlist in place so if one customer is unable to receive a shipment, the product can go to the next person and not be wasted.
If it’s not possible to diversify suppliers, at least have alternate transport, routes, or timelines in place in case of weather or human errors. For key products or supplies, managers may choose to accumulate extra stock as a buffer strategy, so operations can continue for a period of time if anything happens.
Managers can also mitigate supply chain risk with technology. Today’s supply management systems enable real-time tracking and automatic notification, and risk management systems utilize organization-wide data to highlight trends and problem areas. Use insight from these systems to address high-risk partners, locations, or modes of transport. With clear ideas of where problems lie, it is much easier to prevent or reduce occurrences.
Regular communication with all parties is another way to reduce risks. If managers approach the supply chain from a collaborative perspective, with all links as partners who should do their best to assist each other, disruptions and issues are less likely. This partly depends on who the organization chooses as business partners, but any manager can work on developing successful relationships through finding suppliers with common goals and strategic planning. Find more strategies here.
Finally, there is always the option of supply chain insurance to protect the organization against disruption risks.
To ensure continued success, set up a monitoring system that will enable visibility of the entire chain and its process. If any kind of disruption occurs, it’s important to find out about it quickly. Ideally, notification will happen automatically. For example, if a supplier notes that their truck has been delayed because of a storm, this will trigger the system to send the information to all relevant parties.
Monitoring is crucial because it enables fast response. The longer the time between an incident and its response, the more severe it is likely to be. If a problem goes unacknowledged, it’s likely to be more upsetting to customers, cause reputational damage, and create more widespread issues.
Risk managers should also review the results of their risk management strategies. Is the monitoring system that is in place effective, or does it need to be streamlined? Are all parties efficiently notified and do they know what to do when something goes wrong? Continuous improvement is only possible by continuously revisiting and making changes in areas that don’t deliver all the desired results.
The more complex the supply chain, the more difficult it is to manage associated risks. However, through careful analysis, planning, and action, the organization will be prepared for any supply chain risk. Stakeholders can be confident that no matter what occurs, damage will be minimal and trade will continue to flow.
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