Imagine you’re an executive of a large international business who has just discovered an excellent opportunity of entering a new exciting market just in time when your product design team has developed a perfect product for that market. Naturally, to take advantage of this opportunity, you will need a well-functioning supply chain, which you happen to have.
But there are some risks. That new market is kind of tricky and many companies like yours have failed to make it profitable. Also, the local government’s regulations are a bit strict regarding your local footprint. Next, your target audience in that market is super demanding both in terms of the price and quality.
In other words, making money on that market requires some serious planning and perfect execution.
Do you think that your supply chain management is good enough for this market? Are you confident that it’ll perform well and you’ll meet all the requirements of your target audience?
That’s when it all gets extremely complicated, but one thing remains crystal clear: supply chain risk management is profoundly important for businesses to grow and expand.
Let’s Get into the Specifics
Think about this: 79 percent of companies with high-performing supply chains (these are often referred to as Supply Chain Leaders (SCLs)), have revenue growth that is significantly above their industry average, according to this report by Deloitte.
On the other hand, only 8 percent of companies that were rated by their executives as less than significantly above average on supply chain-related metrics have the same performance.
Without a doubt, managing supply chain is nothing but easy. Rising and falling demand, unreliable supply chain partner, market uncertainty, and even unpredictable weather – here are just some of the challenges faced by companies.
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To know the most difficult challenges as perceived by supply chain professionals, we turn to the SCM World’s 2017 Future of Supply Chain survey. Accordingly, just a decade ago, supply chain risk professionals saw supplier failures, component shortages, and commodity price volatility as the main risks, but things have changed.
In 2017, the top three risks for supply chain management were categorized into three groups:
- War, terrorism and other geopolitical issues
- Natural disasters affecting supplier facilities
- Data security/IT incidents.
Here are the complete data representing how many supply chain management professionals perceived these threats as significant.
No surprise that SCM World named these problems “new worries” because they’re very different from those faced by companies a decade ago. Besides, these risks are much more serious (for example, there were about 134,000 reported cyber-attacks on businesses in 2017, or almost 50 percent increase from 2016).
That’s why the number of respondents in the SCM World’s study who were “very concerned” about IT security has been increasing rapidly in the recent years.
Just one properly executed cyber-attack can easily bring down supply chain operations, so it’s sufficient to claim that supply chain risk management can make or break a business.
The same could be said about natural disasters. For example, Supply & Chain Executive reported that there were 260 major natural disasters in 2016 that resulted in an economic loss of $211 billion. The same source also informed that the Chartered Institute of Procurement & Supply (CIPS) Risk Index of 2016 was the highest since records have begun in 1995.
Another significant area of risks worth mentioning is supply chain waste and disruptions arising from abuse and fraud. Companies can manage them with a proactive risk management, an approach adopted by many because of their increasing impact.
For example, Deloitte reported that 85 percent of global supply chains experienced at least one disruption caused by fraud or abuse in 2016. These disruptions included the following.
We can provide lots more statistics and data, but the takeaway here is clear: effective supply chain risk management is critical for any organization to be successful in our ever-changing world. Unfortunately, organizations have to develop this capability by incorporating and mastering a range of supply chain risk assessment methods and addressing specific points.
We’ll review these points in the next section.
The Most Important Supply Chain Points to Address
According to this APICS report, the purpose of supply chain risk management is to “manage, control, reduce, or eliminate real or potential risk exposure to supply chain performance.” Its scope is extensive and spans all areas of the supply chain.
For example, here are some of the most important points that you need to address for an effective risk assessment of your supply chain.
Assessment of Suppliers
Suppliers are one of the most frequent sources of supply chain problems for modern companies, so their performance and quality with any drop in quality investigated. This analysis can reveal problems and give each supplier’s a score indicative of their reliability.
For example, the analysis includes an online investigation; even a mention of a supplier online regarding issues such as scandals, pending legal action, or financial irregularities could be helpful to make a final decision regarding the cooperation.
Design of the Supply Chain
Each company should carefully develop the architecture of its supply chain in terms of location of warehouses, shipping routes, and other critical considerations. The final design should deliver performance and cost demanded by the organization and its customers.
Some executives make a mistake by over-emphasizing cost savings because selecting a cheaper option could result in low headline procurement speed, more risks, undermined reputation, impaired flow of funds, and numerous other problems.
So, choosing a cheap option for your supply chain can be more expensive than you think.
Addressing Unknown Risk
In addition to the common risks described above, an effective supply chain risk management should address unknown risks by preparing and improving the company’s overall responsiveness to them.
For example, you can prepare for them by determining soft risks (the risks that are very difficult to clearly detect and measure, so their effect could be significant) and performing regular inspections and tests.
Ensuring Strategic Requirements for Limitations of Liability and Supplier Insurance
Chances are high that you’re using an external supplier of products or services, so you should be careful about protecting your business and reputation. For example, your cooperation with external partners requires an assessment of potential liability exposure.
Specifically, ensure that you’ve addressed such critical considerations as supplier insurance, indemnification, and limitation of liability in your contracts.
Effective Supply Chain Risk Management is Critical
So, now that we’ve addressed the current state of supply chain risk management, we can confidently claim that it requires special attention because it can make or break your business. As you can see, there is a wide range of risks that you should prepare for to avoid undermining your reputation and losing money.
In other words, supply chain risk management has a strategic importance for modern business, so following correct steps and addressing appropriate points in the chain is a must.
Kristin Savage has graduated from Columbia University where she was majoring in Germanic Languages. Besides English as her first language, she also speaks German and Dutch fluently. Currently, Kristin is studying Spanish and planning to obtain her PhD in Applied Linguistics since she is interested in how to use her to some extent practical knowledge of language processes in everyday life. She has been a writer at Pick Writers for a few years and is known for her thorough approach to all the tasks and aspiration to fulfill assignments with flying colors.