Supply chains always include risks, whether that’s vulnerability through dependence on certain suppliers or external demand spikes for critical products. We’ve put together the following supply chain risk management checklist so you can prepare to tackle the 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, 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 factors, often unforeseen and always disruptive.
While it’s impossible to avoid supply chain risks altogether, the dangers they pose cannot 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?
The first step in putting together a supply chain risk management plan is to understand what the potential risks are. There are a huge range of issues that can negatively impact the operation of a supply chain, but they largely fit into two categories: internal and external risks.
Internal supply chain risks
Internal supply chain risks are risks that sit within your organization and are therefore theoretically able to be controlled if they can be preempted. They include:
- Business risks (disruptions to staff availability, software, or reporting)
- Planning risks (poorly planned processes or inaccuracy in forecasting)
- Mitigation risks (lack of a contingency plan in the event of a supply chain crisis)
External supply chain risks
External supply chain risks, on the other hand, are largely outside of your control and are generally harder to predict. They include:
- Demand risks (miscalculation of demand leading to oversupply)
- Supply risks (issues with the availability of raw materials necessary for the supply chain)
- Environmental risks (unforeseen environmental issues or crises that cause disruption)
- Political risks (sudden changes to the political or geo-political landscape)
- Supplier risks (issues with suppliers, from changes to management to insolvency)
Ways to manage supply chain risks
Carry out regular supply chain risk assessments
The single most important thing you can do to manage supply chain risks is to commit 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 risk assessment checklist, set a schedule, and stick with it.
Make sure your supply base is segmented
You need to know which suppliers are critical to business, which suppliers are vulnerable, and ensure your business isn’t over-dependent on any single supplier. By segmenting your supplier base, you know which are your essential suppliers and 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.
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 can be:
- Requests for early payment
- Chasing payment just as it is 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
This can make you aware of concerns such as demand for a specific product overtaking the supply capacity of that product. This would then cause a risk dynamic on your supply. Being aware of these possibilities and having secondary suppliers as backups can minimize this risk.
Manage environmental risks
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. From floods to viral pandemics, there are a huge range of potential environmental risks to your supply chain’s operation.
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.