A Guide to Identifying Supply Chain Risks

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You can limit the impact of supply chain disruptions on your business by identifying supply chain risks and then developing ways to mitigate them. Best practices document this process in a risk management plan.

Supply chain risks come in varying forms, and with varying degrees of harm to your business. There are two main types of risk to include in your supply chain risk management plan.

Types of supply chain risk

External supply chain risks

These risks are those that are outside of your control and that makes these risks more difficult to resolve. They can be driven by events either upstream or downstream in the supply chain. They include:

  • Demand risks, caused by unpredictable or misunderstood customer demand
  • Supply risks, caused by any interruptions to the flow of product, whether raw material or parts, within your supply chain
  • Environmental risks that come from outside the supply chain and are usually related to economic, social, governmental, and climate factors, including the threat of terrorism
  • Business risks, that can be caused by factors such as a supplier’s financial or management stability, or purchase and sale of supplier companies
  • Physical plant risks that can be caused by the condition of a supplier’s physical facility and regulatory compliance

Internal supply chain risks

These risks are those that are within your control to some degree, so the business has more opportunities to mitigate these risks. These types of risks typically include:

  • Manufacturing risks, caused by disruptions of internal operations or processes
  • Business risks, caused by changes in key personnel, management, reporting structures or business processes, such as the way purchasers communicate to suppliers and customers
  • Planning and control risks, caused by inadequate assessment and planning, which amount to ineffective management
  • Mitigation and contingency risks, caused by not putting alternative solutions in place in case something goes wrong
  • Cultural risks, caused by a business’ cultural tendency to hide or delay negative information.

Here’s how you can mitigate these risks so that if they do happen, they have minimal impact on your supply chain.

Review existing risk management plan

Now knowing how to identify supply chain risks, the first critical step is to analyse your existing risk management plan. Pay attention to your supply chain process to find out which sectors require urgent attention. Do not leave any short-term solutions or loopholes unaddressed as this might lead to serious implications in the future. A full investigation of all sections within your supply chain should then be implemented to expose possible risks.

Evaluate the data

To help with prioritising risk, you can create a risk scorecard system to measure insecurity levels of a particular process in the supply chain. Ensure the root cause of the problem is identified since possible risks in a particular section have the potential to negatively impact other departments of the organisation as well.

Inform key personnel

Integrate supply chain risk management into the organisation by assigning people clear roles and responsibilities within the process. When processes for mitigation and contingency plans are in place, key personnel should be informed of the processes so when risks do ensue, the harm is reduced because people are aware of what is needed to be actioned.

Risk management is a vital strategy necessary for all companies engaged in logistics and supply chains. By observing and analysing the gaps between the processes, the root causes can be found and preventive measures can be taken to minimise potential harm.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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