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Organizations are experiencing rapid supply chain expansion with decentralized supplier base. Although expanded supplier based in supply chain have helped organizations in gaining major cost advantage and market share but it has resulted in more unstable supply chain. Supply chains are vulnerable to various types of disruptions caused by uncertain economic cycles, consumer demands, and natural and man-made disasters. Consequence of an unstable supply chain has increased risks in conducting business operations and raises concerns on continuity of manufacturing or service delivery operations. Supply chain risk management needs to be adopted as best practice for supply chain governance to minimize impact on financial strategy and profitability.
Supply chain and manufacturing methodologies such as lean, Just-in-time and outsourced supplier network have provided major benefit in the value chain but are causing serious concerns too. For an example, a high-technology manufacturer in US relies on South Korean hard disks for assembling personal computer in US. The manufactured has realized great saving potential but has risk of disruption in operation due to political instability in neighboring countries. Similarly a leading automobile manufacturer uses Just-in-Time process model for assembling its car from its preferred vendor but runs a high risk of business loss if the vendor violates a regulatory requirement.
Businesses can face multiple risks across its entire supply chain such as supplier, process, regulatory, intellectual property, political and economic risks.
Supply Chain Risk CategoriesSome of supply chain risks include:
- Supplier Risks
- Early/late shipments or delivery to wrong location
- Non-conforming/wrong product or quantity
- Supplier processes
- Sole source supplier
- Deteriorating performance
- Credit/financial problems
- Labor practices
- Long-term investment in capacity, innovation, performance, etc.
- Capacity ramp/rollout problems
- Undesirable events (storm, flood, earthquake, etc.)
- Contract, legal and regulatory non-conformance
- Information system failure and compromises
- Supplier country political stability
Organizations should adopt a risk framework for its supply chain processes to identify key risks, manage, mitigate and minimize the impact on business performance. Some of the steps in supply chain risk management process include:
- Risk Analysis and Risk Self-Assessment - Document and evaluate risk framework for entire supply chain processes. It should include
- Key processes: Procurement, Manufacturing, Order fulfillment, Customer complaints and returns
- Risks: Supplier, Legal, Intellectual Property, Demand Chain, Regulatory
- Events: Automated or manual assessment of events such supplier non compliance with SLA
- KRIs (Key Risk Indicators)
- Control Design and Assessments - Define a set of controls to mitigate supply chain risks
- Loss Tracking and Key Risk Indicators (KRIs): Track loss incidents and near misses, record amounts, and determine root causes and ownership. For an example supplier’s failure to deliver raw material can result in market share loss and revenue loss.
- Issue Management and Remediation: Manage issues arising out of supplier assessment, audits and loss events and enable systematic investigation plan for issue remediation and risk treatment.
- Risk Scorecards and Dashboard Reports: Get visibility into the risk analysis, key risk metrics and risk heatmap to proactively identify areas in supply chain which needs attention.
Supply Chain Risk Management Process
Supply chain management decisions have started overlapping with corporate financial strategy and CFOs are working on ways to reduce cash-to-cash cycle times, achieving profitable growth, delivering predictable revenue and reducing the company's risk profile. Companies without centralized supply chain governance can negatively impact procurement, manufacturing and time to market processes in supply chain, which can impact company's financial strategy. Supply chain risk management is an essential part of the supply chain governance system to ensure risks are identified in the entire value chain and mitigated to deliver financial goals. |
