Organizations are experiencing rapid supply chain expansion with decentralized supplier base. Although expanded supplier base has helped in gaining major cost advantages and market share, it has resulted in a more unstable supply chain. Supply chains are vulnerable to various types of disruptions caused by uncertain economic cycles, consumer demand, and natural and man-made disasters. Consequently, a volatile supply chain can lead to increased risks for the enterprise and raise concerns on the 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.
A well established supply chain and manufacturing methods such as Lean manufacturing, Just-in-Time Production and outsourced supplier network, have provided major benefits in the value chain but at the same time are causing serious concerns. For example, a high-technology manufacturer in US relies on South Korean hard disk drives for assembling personal computer in US. The manufacturer has realized great savings potential but runs the risk of disruption in operation due to political instability in the neighboring countries. Similarly a leading automobile manufacturer uses Just-in-Time process model for assembling cars with parts 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.
Some 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
- Lack of 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 their supply chain processes to identify key risks and manage mitigate and minimize their 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 as supplier non compliance with service level agreements (SLAs).
- 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 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 heat map 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.
The lack of sustainable supply chain governance can negatively affect procurement, manufacturing, and time-to-market, with an impact on the company’s financial strategy. Supply chain risk management is an essential part of the supply chain governance system in order to ensure that risks are identified in the entire value chain and mitigated to achieve financial goals.