Today’s supply chain risks are increasingly diverse as disruptions can come from a wide variety of sources, including physical damage at production facilities, natural disasters, strikes and labour disputes, capacity issues, delays, inventory stock problems and incorrect forecasts. Supply chain risk management is becoming a top priority in procurement because losses from supply chain disruptions are extremely costly. Here we identify five types of supply chain risks and practical tips for offsetting them.
This type of risk involves choosing the right supply management strategy. There is no “one size fits all”; what might be right for one business might not be right for yours. For example, a small-sized business may choose to source locally because they do not have the resources or capacity for global suppliers.
From the onset, define your company’s strategy, then identify and qualify the right suppliers, using reliable market research to inform the best decisions.
Market risk involves your company brand, compliance, financial and market exposure. When outsourcing part-production or even entire product lines, you may be putting your company in a more vulnerable position and often at the mercy of your suppliers. If your suppliers deliver an inferior product, fail to deliver entirely or implement unethical processes, your customers and key stakeholders will be scrutinising your company, not your suppliers.
Create a tolerance margin for a product line’s quality standards and determine the possible impact of a compromise. Monitor those lines closely to detect early warning signs before issues negatively affect your company’s brand, ability to meet compliance regulations and the bottom line.
This type of risk involves supplier implementation lead-times, production and performance ability. It is important to know who you are working with and what their capacity issues are before signing on with suppliers. Working with a supplier where your business only represents a smaller fraction of their revenue can sometimes mean you may not get the level of attention that you want or need.
Engage in new suppliers quickly to gain early visibility into any risks that might hinder production, lead-times, initial performance, and other important factors affecting this.
This type of risk involves ongoing supplier quality and financial issues. When your company has selected a supplier, it is important to continually monitor key performance factors. Companies are changing all the time, from being newly acquired, a shift in strategy and goals, to going out of business, so constant vigilance and contingency plans are needed.
Continuously monitor all of your suppliers to avoid disruptions caused by bankruptcies and liquidation, performance issues, ownership changes, labour strikes, geopolitical changes, and other factors. Using monitoring technology as well as having a good communication and working relationship with suppliers will help.
This type of risk involves demand and inventory stock fluctuations. Many suppliers will take on new opportunities, however, enthusiasm does not necessarily mean they are in the best position to deliver and cater to your expectations.
Keep an eye out on your suppliers for signs that indicate they are overwhelmed with new contracts. Set expectations right from the beginning and have contingencies in place if suppliers cannot deliver.
Understanding supply chain risks can enable your company to take effective action where necessary. Supply chain risk management should form an integral part of good company practice to deal with costly supply chain disruptions. It is essential to address the right risks and use the right strategies from the onset, and continuously monitor and review these to mitigate potential risks.