Supply chain risk management is a process crucial to sustaining competitive advantage. When taking into consideration the ripple effect a single disruption has on key players involved in the supply chain it can cost millions and sometimes billions of dollars.
One of the most recent examples was the MV Ever Given, a 400-metre-long container vessel completely blocking the Suez Canal. For context, the Suez Canal is one of the world’s busiest channels for shipping oil, refined fuels and grain. Consequently, the blockage held up an estimated $9 billion in valued trade each day. Bear in mind that this estimate considers the value of cargo alone and fails to consider the total economic damage that countries worldwide suffered in the face of fear that the blockage could continue for several weeks.
Although these events may not occur often, they do hold the potential to devastate a company’s profits. Therefore, it is no secret that there is high importance in creating a supply chain risk management strategy. If teams do not, they may find themselves in a situation where their competitors can deliver essentials in their place, making their own business obsolete in the meantime.
That said, putting a process into place to navigate this uncertainty is a task easier said than done. For this reason, we set out to create a list of steps any team can follow to create their own supply chain risk management strategy.
Supply Chain Risk Management, Defined
Before identifying a strategy, teams do well to consider “what is supply chain risk management?” By definition, supply chain risk management (distilled to the acronym SCRM) is a combination of efforts of an organization, business or firm to discover areas of weakness and strengths, create assessments, and mitigate threats for each of the major steps in your supply chain operation.
Since supply chains can be complex, achieving these steps requires using several strategies and specialized software to help track these disruptions on a large scale.
1. Identify What You Are Up Against
The first step in building a strategy is knowing the full extent of the potential disruptions your team is likely to find themselves up against. Unfortunately, as a part of this step, teams must recognize that they will only be able to identify their known risks, leaving some unknowns on the table.
To understand the differences, consider that known risks can not only be identified but are possible to measure their impact and, therefore, manage over long periods of time. Some examples include the likelihood one of your known suppliers declares bankruptcy, a possibility calculated by an in-depth review of their financial records. Since these risks are possible to identify, teams can actively monitor and create mitigation plans for each identified disruption. This might mean having a supply chain finance program for prequalified suppliers in place or having an alternative prequalified supplier at the ready in the example listed above.
On the opposite side, teams might come across unknown risks and disruptions that are incredibly difficult, if not impossible, to predict. Some examples may include a natural disaster in an area that hasn’t experienced a storm of that nature in the last century. Although it can be hard to mitigate against the unknown, teams are encouraged to ensure they optimize their response times to known risks. By doing so, teams can practice their agility and on-the-spot thinking, thereby better preparing them when an unknown risk does occur.
2. Assessing Impact and Likelihood of Occurrence
After breaking down your risks into the known and unknown, teams will come across the next step, assessment. One of the most common ways teams do this is by mapping out and assessing each known risk to each major supply chain entity, including suppliers, manufacturing plants and transport routes. Alongside identifying these risks, teams will need to consider the impact of each risk on the organization, if it were to occur, the likelihood of the risk occurring and how prepared the organization is to deal with said risk.
The resulting scoring methodology then becomes crucial in determining the prioritization of threats.
3. Make Your Mitigation Plan
Now, with the priorities in line, teams must determine the mitigation strategies that can be employed. Similar to step one, creating a mitigation plan is a two-step process which considers both how risk can be proactively mitigated and reactively addressed. With data available to your team, teams can determine what steps can occur to help prevent disruption from occurring. For example, consider that cybersecurity risk may be mitigated with software updated regularly.
Alternatively, in an example of physical goods, teams may ensure they have a backup supplier that is not in the same geographic area as their primary supplier or even ensure that sole sourcing events are kept to a minimum.
In tandem, the reactive part of this step more closely resembles a catalogue of risks turned into action plans. These plans should include enough detail that if XYZ were to happen, each member of the team knows what their role is in helping to avoid a full-blown disruption.
4. Continuous Monitoring
Once steps two and three are complete, teams must ensure they have the infrastructure in place to continuously monitor these risks. Given that the supply chain is now more international than ever before due to outsourcing, achieving a 360-degree view of the end-to-end ecosystem requires more than looking down at the manufacturing floor from a floor two office. Fortunately, modern technology, including ERP extensions, vendor portals and artificial intelligence (AI), make it possible to manage complex supply chains and track the leading indicators of risk.
While a system to monitor risk is considered a bare minimum for teams, the actual execution of this system will depend on the organization’s needs. Consider that an organization specialized in manufacturing will likely track any deviations in a line to help identify a future quality issue. For this reason, solutions like the ConvergentIS Vendor Management portal, as an extension of the already powerful SAP system, can be useful as a plug-and-play solution that addresses some of the specifics your business faces.
Building a Management Strategy That Works
Hand-in-hand with supply chain risk, teams will find themselves up against the equally complicated vendor management process. To help teams navigate, yet another process primed for optimization, we created a manufacturing guide for procurement, free for download.