Assessing and managing supply chain risks

Supply chains always include risks, whether that’s vulnerability to external threats or a lack of preparedness for potential internal issues. We’ve put together the following guide to supply chain risks so you can prepare to tackle any challenges your supply chain might present.

Supply chains make the world of commerce go round. Without the smooth operation of established supply chains, manufacturers wouldn’t have raw materials to produce with, retailers wouldn’t have products to sell, and consumers would be greeted with empty shelves. But supply chain resilience is tested all the time by both internal and external risks, often unforeseen and always disruptive.

While it’s impossible to avoid these supply chain risks altogether, the dangers they pose can’t be ignored. And with that said, it’s important to consider what risks are present in your supply chain and, more importantly, what you can do to prepare for them.

What are supply chain risks?

Supply chain risks are uncertainties in the supply chain process that can have a direct impact on a business’s ability to maintain their operational health. In other words, they’re vulnerabilities which, when ignored, can cause major supply chain management issues.

Given the threat they pose, it’s natural for businesses to be concerned with how to identify and avoid them. But the first step in assessing supply chain risks is to understand what the potential risks are. There are a huge range of issues that can negatively impact the healthy operation of a supply chain.

Some come from inside the business, and are therefore theoretically able to be controlled if they can be pre-empted. Others are external, and therefore largely outside of the business’s control and difficult to predict.

These are some of the most important types of supply chain risk to be aware of:

• Business risks: Risks that originate from a business’s operational practices, such as low staffing levels presenting the risk of business disruption.
• Planning risks: Risks that arise from a lack of forward-thinking or an inability to accurately forecast future changes to supply and demand.
• Mitigation risks: Risks associated with not having a comprehensive contingency plan in the event of a supply chain breakdown or crisis.
• Demand risks: Risks relating to a poor understanding of customer demand which can result in inefficient working capital usage, like over- or under-stocking inventory.
• Supply risks: Risks associated with the availability or affordability of goods or raw materials necessary for production, or the supply chain process that brings them to the business.
• Environmental risks: Risks that relate to largely unpredictable environmental issues or crises that can cause severe supply chain disruption.
• Political risks: Risks stemming from the geopolitical environment, such as sudden changes to the political landscape in a key supplier’s country.
• Cybersecurity risks: Risks associated with a lack of effective cybersecurity, or a poor understanding of potential cyberattack vectors.
• Supplier risks: Risks that are directly associated with certain suppliers, or the supplier base as a whole, such as a supplier’s financial instability or a lack of key supplier backup options.

Each of these risk categories contains a diverse range of individual risks. And, while not all of these risks will be relevant to any given business, it’s still important to prepare for them.

Ways to manage supply chain risks

With an understanding of the main categories of supply chain risk and an awareness of which risks are most relevant to your business, the next step is to figure out how you can manage them. These are some of the best ways to stay on top of supply chain risks and ensure your business’s continuity.

Carry out regular supply chain risk assessments

The single most important thing you can do to manage supply chain risks is committing to carrying out a thorough supply chain risk assessment on a regular basis.

Following a proper risk assessment process periodically gives you the best chance of identifying risks before they arise, hopefully helping you to avoid them altogether. Put together a formal supply chain risk assessment checklist, set a schedule, and stick with it.

Make sure your supply base is segmented

Your suppliers are one of the biggest sources of supply chain risk. To protect your business, you need to know which suppliers are critical to operations, which suppliers have serious vulnerabilities, and how effectively your supplier base is diversified.

By segmenting your supplier base, categorising them according to their importance to your business, you can mitigate the most threatening risks. This process will help you find your most essential suppliers, meaning you can prioritize their enrollment onto an early payment program for supply chain finance or dynamic discounting. This will help you manage and mitigate risk within the supply chain.

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Keep track of your suppliers’ operations

You can use websites such as Dun & Bradstreet to see if your suppliers are financially stable. You can also check debt ratios and unemployment rates in the city or area of the supplier, as this can indirectly cause supplier issues. This knowledge will allow you to pick up telltale signs that your suppliers could be struggling. Examples of these signs include:

• Requests for early payment
• Chasing payment just as it’s due
• Credit ratings for a supplier that is a public company
• The supplier’s financial choices over the last 12 months (i.e. big purchases or expansions that could lead to the supplier being over-leveraged)

You can start seeing indicators six months in advance that point to the supplier going insolvent – cutting salaries, layoffs, cutting budgets, or changing to a lower cost product.

Carry out regular market analysis

Committing to carrying out regular market analyses can help make you aware of growing risks, such as demand for a specific product overtaking the supply capacity of that product. Being aware of these possibilities means you can prepare to tackle them in advance, by sourcing secondary suppliers as backups for example.

Manage environmental risks

From floods to viral pandemics, there are a huge range of potential environmental risks to your supply chain’s operation. And strengthening your supply chain against the threats posed by environmental factors is more important than ever as the rate of climate-change fueled environmental crises increases.

There’s no way to prevent these risks, but by staying aware, you can maximize your chances of being able to counteract them in good time. This might include having a list of backup suppliers to fall back on, keeping tabs on weather patterns in key locations, and having a suitably agile operational structure.

Improve your cybersecurity processes

The switch to digital-first as a way of operating a business has brought a multitude of benefits, but it also opens more risks. Most concerning among these is the risk posed by cybersecurity threats such as rogue actors, hackers, viruses, and malware. When management of your supply chain becomes a purely digital process, you’re putting a lot of trust in your cybersecurity measures to prevent disaster.

Thankfully, there are a range of well-established methods for improving your organization’s cybersecurity practices, from implementing internal access permissions for key software to considering more sophisticated measures such as DNS filtering.

Strive for better supply chain visibility

A supply chain is made up of many different stages, and each stage presents unique risks. Some of those risks are bound to be early in the chain, but these early-stage risks can be the most disruptive, as they create a domino effect that can cause delays and incur additional costs. Accordingly, it’s important to maximize your visibility over the supply chain, in turn improving your awareness of potential risks at each stage.

The best way to broaden supply chain visibility is with an end-to-end inventory management system. A solution that enables you to track inventory through each stage of the supply chain brings complete transparency to the process, making it easier than ever to understand where points of failure often pop up.

Implement a contingency plan

Finally, it’s important to have a comprehensive contingency plan that will support you in smoothing out operational challenges that could result from each of the most credible risks in your supply chain. If you identify the high risk of a certain supplier going insolvent, for instance, your contingency plan will involve selecting a backup supplier to step in if needed.