Identifying and Managing Supply Chain Risk

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Supply chains consist of many different activities and stages. Upstream are the suppliers and manufacturers who transform raw materials into finished goods, while the downstream supply chains distribute these goods and services that will eventually reach an end user.

Supply chain risk is often unavoidable because of external factors that cannot be controlled. The various links in the chain depend on each other and if one stage in the process fails or one business within the supply chain is unable to deliver a product or service to the next link in the chain, the entire supply chain can be disrupted.

Establishing a risk management plan is necessary to understand any potential risks to your business and find ways to minimise their impacts. Identifying supply chain risk requires an assessment of all possible scenarios and the likelihood of occurrence at every stage before developing strategies to manage each of these risks.

In addition, you need to ascertain the cost involved and the likelihood of successful risk mitigation and how you will measure results. Good planning will help your business recover quickly if an incident occurs.

Types of supply chain risk

Risks to a supply chain present in many forms. External risks are those that you have no control over such as weather, natural disasters, geopolitical events and inadequate logistics infrastructure. Risks can be driven by events either upstream or downstream in the supply chain.

Internal risks provide greater opportunities to mitigate threats to the business because they are within the business’s control. These can arise due to changes in key personnel, management, reporting structures or operational processes. Other risks include some or combinations of the following:

  • Business risks from financial or management instability, failure to comply with regulatory obligations and even the purchase, sale and mergers of supplier companies
  • Supply and demand risks caused by unpredictable consumer demand, poor forecasting or interruptions to the flow of product in the supply chain, whether raw material or parts
  • Infrastructure breakdowns and physical plant risks caused by the condition of physical facilities, machinery and equipment
  • Inventory risk due to poor inventory control
  • Logistic risks from service providers not operating or performing as needed and impacting the ability of business to supply products and provide services
  • Employee risk such as illness, skills shortages or industrial action
  • Bottlenecks and manufacturing risks are caused by inadequate assessment and planning and result in disruptions to internal operations or processes.

Assess your business

What are your critical business activities key services, resources and staff? What are the things that could adversely affect them? Assessing your business will help you work out which aspects such as power failures, natural disaster and illness you can’t operate without.

Think about the worst-case scenario that could hit your business. Once you’ve identified the appropriate supply chain risk, you’ll need to analyse their likelihood and consequences and then come up with options for managing them.

By understanding potential supply chain risks and finding ways to minimise their impacts, you can help your business recover quickly if an incident occurs.

Manage potential risks

Once you have accessed possible supply chain risks, the next stage is to determine how you will manage these. What is the best approach to mitigate the risk and who are the personnel responsible for treatment?

  • Ensure staff are adequately trained in their roles and that regular repair and maintenance is done on machinery and equipment
  • Manage quality control processes; auditing and compliance activities can reduce the chance of issues occurring
  • Utilise cloud technology solutions such as real-time inventory control and warehouse management software
  • Minimise risks and optimise response to supply change problems with site data backup

While you may be able to predict and deal with many potential risks, there will be some that are unexpected or impossible to plan for. Preparation and planning will at the very least guide you to effectively manage these situations if they happen.

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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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