How Risk Management Can Protect the Supply Chain

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As most business owners or managers know, there are a wide variety of potential problems and common process deficiencies that can threaten the operational success of a business’ supply chain. Risks, both internal and external, both foreseen and unforeseen, provide businesses with a constant and always shifting challenge – how can risks be suitably managed and profitability learned from? Fortunately, the diverse realm of risk management offers an arsenal of weapons to use against supply chain breakdown. With this in mind, let’s take a closer look at how risk management can protect your inventory supply chain.

Proactive vs. reactive risk management

In March 2000, an electrical surge caused by a lightning strike in New Mexico, resulting in a fire in a local microchip plant. The factory in question supplied microchips to two cell phone giants, Nokia and Ericsson, something that was necessary for both companies to operate.

The now well-documented difference between the way the two companies responded to this accident was to do with their flipside-of-the-same-coin application of risk management. Nokia had a multi-supplier, risk analysis-strong process in place whereas Ericsson didn’t. For Nokia, this meant they already had in place a process to source microchips from another supplier, rendering the accident largely benign. For Ericsson, the opposite was true – they had no other supply options in place and proceeded to lose $400 million over the period of the factory’s inactivity.

While this is an extreme case, it highlights the difference between proactive and reactive risk management. The fact that Nokia already had in place a plan B meant that their operations and profits were preserved from unforeseen circumstances.

Guarding against unforeseen events

It may sound like an impossible task, but protecting a business against possible unforeseen events is what risk management is all about. And when it comes to preserving the supply chain, nothing could be more important.

For all inventory-centric businesses, the supply chain is a living blueprint of their current inventory transactions. Stock moves in and out at every node, leaving behind information that in turn feeds into the wider scope of inventory management. The more complex the supply chain, the more that can go wrong.

And while there are a variety of risks, there are also a variety of things that can be done to mitigate them. There are of course certain risks that are common to a particular industry. The microchip example was something that cell phone manufacturers could foresee, as Nokia did. Ericsson not foreseeing this can be viewed as a failure of risk management.

Tailored for your business

The other side to the equation is considering how your risk management can be tailored to suit your business. There are times when a business is too aggressive with their risk management, which can result in snowballing costs. Throwing money at a potential risk won’t automatically fix it.

In every case of risk analysis and mitigation, the likelihood of the risk actually occurring, along with the potential cost of resulting losses, needs to be considered alongside how much the proposed risk management will cost the business.

Tailoring risk management in this way means you can tread the line between too much cost and too much risk. And while risk is a constant factor in a business’ daily life, with the right use of risk management, these risks can be minimized and where possible, removed or mitigated.

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Melanie - Unleashed Software
Melanie

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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