The supply chain describes the processes and transfer of products and information from the origin or supplier all the way to the checkout counter in-store. As this is such a complex chain involving many hands and sometimes multiple countries with corresponding currencies and regulations, it can be fraught with uncertainties and risks. The supply chain is also one of the fundamental components of a company’s operations and therefore, the multiple possible risks must be correctly managed. In this article, we consider how to identify supply chain risks and manage them for long-term profitability.
Inherent types of supply chain risks
There are two broad categories of supply chain risks, these being external and internal risks. External risks are outside of your control while internal risks remain within your control. External risks arise from events prior to your involvement or after your involvement in the supply chain, and involve things such as demand, supply, environmental issues, business and equipment. Conversely, internal risks arise from processes or events within your business and subsequently your control and include factors such as manufacturing, business, planning and control, contingency plans and cultural norms within the company.
Process of dealing with risks
Risks are inevitable and arise from uncertainties that cannot be predicted. However, risks can be dealt with effectively to minimise their impact. This process involves identifying them, analysing them for their effects and eventualities and then working to mitigate them so their impact can be reduced.
Identification of supply chain risks
The first step to identifying risks is to know what is considered a risk to your company, that is, something that your company could not function without. To do this, you need to itemise your critical business activities, your primary services, key resources and staff. Following this, you can move on to considering your supply chain that feeds into these business areas.
This involves scrutinising your supply chain for the various opportunities for misadventure to occur, considering both internal and external components. The specific areas to analyse for risks include your service providers or suppliers, the products or commodities themselves, the geographical and economic structure of recipient countries and the logistics infrastructure.
Ask the hard questions
To scrutinise these areas, you need to consider a range of questions including:
- What if [key business operations or equipment] did not occur, failed, was stolen, damaged or broke down?
- What if [key member of staff] left the company?
- What if [adverse natural or man-made event affecting supply and transportation] happened and supply instantly ceased?
- What if [key stakeholders] pulled out financially?
Seek input from your accountant, stakeholders and even staff who may see things differently from you and be capable of identifying risks you had not thought of.
Analyse historical events and track records
Be aware of what has occurred historically with similar companies to yourself or even with your suppliers to analyse what the effects of adverse events were and how you would best be able to mitigate them when placed in the same position.
Assess your company operations
Using analytics, flowcharts, and audits, assess your company processes in detail to ascertain areas for potential risks and how best they could be absorbed without affecting downstream operations. This may also best be done with more than one pair of eyes and viewpoint.
Imagine the worst
Despite optimism being a virtue, to avoid risk, it is important to imagine worst case scenarios. This might involve analysing real data and events or calculating risk based on every operation in a supply chain failing. Once you have identified these areas and prepared ahead of time, you are better able to manage them should they occur.
Assessing your suppliers
When considering your suppliers, you are at direct risk if they are known to mismanage their responsibilities or financial obligations and as such, you should be ascertaining their financial status, any companies they are associated with and any news or updates about their company performance. How do you do this? By obtaining business credit scores that portray the financial state of the company, any legal proceedings they are involved in and any leadership changes they have experienced. Next, it is important to compose a corporate family tree for your suppliers to ascertain which companies they are associated with be it parent or sister companies. Ultimately, any ill-fate in the family can affect them followed by your own company by association. Following this, it is always good practice to monitor business news and be aware of any headlines on companies you do business with.