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Protect Your Business from Supply Chain Risks

Supply chain risks - Image from pixabay by MICHOFF

Over the years, many businesses have experienced unanticipated supply chain risks i.e., disruptions and vulnerabilities. This has resulted in recalls that cost hundreds of millions of dollars in sectors as diverse as consumer goods, electronics, and automotive. 

Additionally, many public and private organizations have experienced cybersecurity breaches, losing crucial intellectual property as a result of flaws in the supplier ecosystem.

The lack of effective mechanisms to recognize and manage escalating supply chain risks as the globe becomes more linked is at the core of these crises. Cyber-ransom attacks and new vulnerabilities are rising. 

Any halts in the movement of goods, whether components or raw materials, through your supply chain result in risks. Determining the dangers in your supply chain and creating strategies to manage them may reduce the adverse effects of supply chain disruptions on your company. A risk management strategy, a component of your broader business continuity plan, should contain documentation of this procedure.

Two Major Categories Of Risk Management Plans For Supply Chains

Internal Risks

Because internal risks are within your company's control, they offer better options for mitigation. The following five categories of internal risks:

  • Risks associated with mitigation and contingency planning – This result from failing to have backup plans or other remedies in place in case something goes wrong.
  • Cultural risks - are brought on by a company's propensity to conceal or delay bad news. These companies typically take longer to respond when confronted with unforeseen circumstances.
  • Manufacturing risks - are brought on by internal procedures or operations disturbances.
  • Business risks - Changes in key employees, management, reporting structures, or business procedures, including how buyers interact with suppliers and consumers, might result in company hazards.
  • Planning and risk control Risks - are brought on by poor assessment and planning, which translates to poor management.
Supply chain risks - Image from pixabay by MICHOFF
Supply chain risks - Image from pixabay by MICHOFF

External Risks

Events, either upstream or downstream in the supply chain, can act as a catalyst for external hazards. External risks can be divided into some categories:

  • Demand risks - are brought on by erratic or misinterpreted end-user or customer demand.
  • Supply risks - are brought on by any halts in the movement of goods, components, or raw materials along your supply chain.
  • Environmental risks - arising from sources outside the supply chain; frequently connected to issues in the economy, society, politics, and climate, including the threat of terrorism.
  • Business risks - are those brought on by things like a supplier's management or financial stability or the buying and selling of supplier firms.
  • Physical plant risks - these are brought on by the state of a supplier's physical facility and its compliance with regulations.

Although both public and private organizations are implementing ways to address the supply chain risk, there are several reasons why the task is still ambiguous. Such reasons include:

  • It is challenging to ensure supply-based transparency. A single product may consist of hundreds or thousands of suppliers in contemporary multi-tier supply chains. It can take a lot of time to list all the vendors, from the raw material suppliers to the finished assembled system.
  • The size and scope of the hazards are frightening. It can be challenging to determine the likelihood and severity of many dangers. They are challenging to handle, measure, and mitigate.

Instead of praising the issue and these challenges, moxeconsulting advises firms to start approaching problems methodically, cataloging and addressing known risks while enhancing the firm's resilience to the inescapable unknown risk that poses a problem in the future.

How Can We Approach The Supply Chain Risk Management

1. Known Risks

Identifying, quantifying, and managing known hazards across time is possible. For instance, a supplier going out of business and causing a supply disruption would be a recognized risk. Based on the supplier's historical financial statements and considering the goods and markets the supplier may disrupt, you can assess its likelihood and quantify its impact on your company. 

Organizations can manage their known-risk portfolio through the following four processes by combining organized problem-solving and digital tools:

a. Determine And Record Risks.

The value chains of all main products are often mapped out and evaluated as a standard risk identification strategy. Then, a thorough evaluation of each supply chain node, including suppliers, plants, warehouses, and transit routes, is performed (Exhibit 1). Risks are meticulously tracked throughout time and put on a risk register. This step should also note parts of the supply chain where no data are available, and additional research is needed.

b. Create A Framework For Supply-Chain Risk Management.

To create an integrated framework for risk management, each risk in the register should be graded based on three factors: the likelihood that the risk will materialize, the impact on the company if it does, and the organization's preparedness to handle that particular risk. The risk scores indicating the organization's risk appetite apply tolerance criteria.

Developing and applying a standardized scoring technique is essential to evaluate all risks. This enables the prioritization and aggregation of threats to pinpoint the value-chain nodes and products that pose the most significant risk of failure.

c. Track Risks

Persistent surveillance is one of the critical success elements in identifying risks that could harm a business once a risk-management framework has been implemented. The recent development of digital tools that identify and monitor leading indicators of risk has made this possible for even the most complicated supply chains.

Successful monitoring systems incorporate impact, likelihood, and preparedness perspectives and are tailored to the requirements of a business. However, to increase the likelihood of mitigating, or at the very least limiting, the impact of their occurrence, it is essential to establish an early warning system to monitor top risks.

d. Institutional Oversight And Periodic Evaluation

Establishing a robust governance structure is the crucial last stage in enhancing the supply chain's resilience and agility by regularly defining mitigation actions and reviewing supply chain risks.

A cross-functional risk board with representatives from each value chain node is an efficient supply-chain risk-management governance tool. Line managers who also serve as risk owners for their respective functions are generally included, giving them responsibility for risk identification and mitigation.

An efficient board will hold regular meetings to examine the significant supply chain risks and decide on appropriate mitigation measures. Implementing mitigation measures for each participant's functional node will subsequently be their responsibility. 

Supply chain risks - Image from pixabay by makabera
Supply chain risks - Image from pixabay by makabera

2. Unknown Risks

Unknown hazards are those that are impossible or extremely challenging to anticipate. Imagine a long-dormant volcano suddenly erupting, disrupting a supplier you weren't aware was part of your supply chain. Even the most risk-averse managers may find it difficult to predict situations like this.

Maintaining a competitive advantage requires lowering the probability of unknown risks and speeding up response times when they materialize. An organization can benefit from this advantage by erecting sturdy layers of defense and fostering a risk-aware culture.

Ways To Mitigate Unknown Risks:

a. Creating Effective Defenses

Strong defenses help a company discover and stop unexpected hazards before they impact operations, from the language of the request for proposals (RFP) to worker training. The primary layers of protection that businesses use to protect themselves against unknown threats are shown in Exhibit 2.

b. Creating A Culture Of Risk Awareness

Risk-aware culture enables an organization to create and maintain robust defenses against unknown hazards and act more swiftly when such risks emerge and endanger operations.

  • Transparency. Leaders must define and communicate an organization's risk tolerance properly. Aligning which risks must be mitigated and which may be absorbed by the business is crucial because risk mitigation frequently comes with an added expense. A company's culture should also encourage the open sharing of risk indicators from both the inside and outside.
  • Responsiveness. Employees must have the freedom to notice and respond to external change quickly. This can be made possible by fostering an environment of ownership, where participants take responsibility for the results of their actions and decisions.
  • Acknowledgment. Management and staff must feel the ability to communicate negative news and lessons learned. This openness develops a culture where discussing and resolving problems is acceptable. When a risky event occurs, it is crucial from a cultural perspective that the organization not become disheartened or accusatory but collaborates amicably to reach a swift resolution.
  • Respect. Employees' risk appetites should match the firm's goals to prevent individuals or groups from taking risks or acting in ways that are beneficial to them personally but detrimental to the organization.

Global supply chains and the associated supply-chain hazards are unavoidable effects of globalization. According to our experience, firms must create effective management plans for known and unknowable supply-chain risks. Leaders must also understand that risk management requires cultural and mental transformations and implementing procedures and governance frameworks.


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