Supply Chain Risk Management (SCRM) is the process of identifying, assessing, and mitigating the risks of an organization’s supply chain. Implementing global supply chain risk management strategies can help an enterprise operate more efficiently, reduce costs, and enhance customer service.
Supply Chain Risk Management Explained
Supply chain management refers to how organizations manage the flow of their goods, including all the processes involved in transforming raw materials the organization consumes into finished products or services the organization offers. It includes planning and managing, sourcing, procurement, conversion, and logistics.
One primary reason that companies implement a global supply chain management strategy is to boost their competitive advantage. That said, the globalization of supply chains can also increase the potential risks to quality, safety, business continuity, and reputation. Those issues need attention too.
Risk Factors in Supply Chain Risk Management
Every company is exposed to both internal and external risk factors from supply chain disruption.
Internal Supply Chain Risks
Internal risks can be classified into five categories:
- Disturbances in internal operations or processes create manufacturing risks.
- Changes in key employees, management, reporting structures, or business processes, such as how purchases connect with suppliers and customers, pose business risks.
- Insufficient evaluation and planning pose planning and control risks, resulting in poor management.
- Mitigation risks result from failing to plan for emergencies or find alternate solutions.
- A company’s cultural predisposition to conceal or postpone undesirable information can pose cultural Risks.
Internal supply chain risks include risk events caused by:
- Disruptions of internal operations;
- Changes in management, key personnel, and business processes;
- Not putting contingencies in place in case something goes wrong;
- Failing to implement proper cybersecurity risk management policies and controls to protect against cyber-attacks and data breaches;
- Not complying with environmental regulations or labor laws;
- Not having the goods to meet customers’ needs.
External Supply Chain Risks
External risks can be triggered by events upstream (that is, among your suppliers) or downstream (among your customers) in the supply chain. External threats are classified into five categories:
- Demand risks result from unforeseen or misinterpreted consumer or end-customer demand.
- Supply risks are created by any disruptions in the flow of goods, whether raw material or parts, inside your supply chain.
- Environmental risks are those that originate outside the supply chain and are typically tied to economic, social, governmental, and climate issues, as well as the possibility of terrorism.
- Business risks are caused by variables such as a supplier’s financial or managerial stability or the purchase and sale of supplier firms.
- Physical plant risks are created by the state of a supplier’s physical facility and regulatory compliance.
External supply chain risks include risk events caused by:
- Unpredictable or misunderstood customer demand;
- Interruptions to the flow of products, including raw materials, parts, and finished goods;
- Social, governmental, and economic factors, including the threat of terrorism;
- Supplier risk management, including concerns related to a supplier’s physical facility and regulatory compliance;
- Natural disasters, such as earthquakes, hurricanes, and tornadoes.
An organization could fall victim to supply chain financial risk if something threatens financial health, such as higher component costs eating into profit margins. In addition, a company might suffer reputational risk if a supplier engages in unethical behavior, such as bribery, child labor, or anything that could reflect poorly on the company’s brand. Finally, a supplier’s social media activity can also harm your brand.
Supply Chain Risk Examples
Supply chain risk includes various problems with vendors, suppliers, shipping agents, resellers, and third parties. Those issues can disrupt production, operations, sales, and projects. They can also lead to quality issues, accountability, and reputational conflicts. Here are some examples of supply risk:
Rising prices are caused by changes in supply or demand, currency instability, and customs tariffs. Volatility in prices can jeopardize the financial projections and profitability of the business.
These can arise from lacking a component, material, or part needed to produce a finished product. Shortages may be short-term availability issues or long-term if the supplier has discontinued the required items.
If litigation or some other dispute ruptures your relationship with a supplier, the scenario could lead you to replace the supplier (assuming you can find a replacement).
Quality failures occur when shipments of certain parts don’t meet the specifications or perform as expected.
Carrier and logistical issues can result in late deliveries, damaged packages, or lost shipments.
Sudden worldwide or industry-wide drop in supply due to events such as a pandemic, natural disaster, labor dispute, war, or trade embargo.
What Are the Steps in a Supply Chain Risk Management Process?
Begin by thinking about balancing operating expenses under standard settings vs. costs under extreme limitations. For example, a framework for your SCRM may look like this:
Step 1: Identify Your Risks
Many underlying hazards in the supply chain are difficult to assess:
- Global economic instability
- Unreported partner/supplier financial concerns
- Future weather, climate change, natural catastrophe issues, and, yes, pandemics
These and many more may be unseen and unforeseeable, but they may create delays, more significant expenses, and diminished sales and customer satisfaction. So learn from the past, observe what is occurring now, and forecast what may happen in the future.
Assessing future risk is the most difficult, even with lessons learned from past occurrences and a sharp eye on present situations. Seeing into the future is difficult, but it does need ingenuity and attention to detail, such as the company’s location, suppliers, distributors, manufacturers, and retailers.
Step 2: Compile Risk Scores
It is critical to understand your risks, how likely each risk is per location or channel, and what impact that risk would have on the supply chain. As a result, risk scoring is an excellent technique to gain immediate visibility into which issues require the most attention.
These risk scores can take the form of numbers, colors, or other graphical representations of how one risk relates to other risks in the supply chain, allowing the relevant risks to be prioritized at the right moment.
Step 3: Define Your Mitigation Strategies and Response Plans
Many businesses have inadequate contingency plans because they don’t devote the time to develop contingencies for each risk.
Going over every possible scenario and listing all of the “what ifs” may seem time-consuming, but it’s the most effective approach to guarantee everyone understands how to respond if future risk forecasts come true.
This form of modeling provides businesses a head start, allowing them to pivot when a crisis develops rapidly. Of course, that crisis may not happen as planned, but evaluating choices ahead of time will put you in a better position if and when the occurrence becomes likely.
Step 4: Develop Your SCRM Plan
Your strategy should be thorough and consider all the information you’ve gathered through previous steps. Every business will develop its own unique risk management plan to address its own unique risks, but according to The Institute for Supply Management, five fundamental practices are likely to be included in any plan:
- Look for other providers;
- Discussions with key suppliers;
- Increasing supplier eligibility;
- Purchasing more supplies;
- Discussions with big suppliers.
What Are Supply Chain Risk Management Strategies?
Several strategies for supply chain risk management have developed over the years. Among the more popular:
Use a PPRR Risk Management Template
PPRR stands for Prevention, Preparedness, Response, and Recovery. It is a globally recognized supply chain risk management strategy employed by organizations. PPPR can significantly help with business continuity planning. Various templates are available online to walk an organization through the PPPR methodology.
Enhance Your Supply Chain Risk Governance
Try the following steps to reinforce your cybersecurity defenses.
- Set standards for supply chain compliance for all of your third-party suppliers;
- Define roles for users and apply security controls to narrow down who can log in to your system and what level of permissions they have, to prevent unauthorized meddling in your supply chain operations;
- Perform thorough due diligence and risk assessment for all vendors and service providers before entering into any contract;
- Fully train all employees on cybersecurity protocols.
Systematically Monitor Risks
The simplest way to monitor your risk management plans consistently is to invest in a scalable digital solution that automates the oversight of your supply chain. This will provide you with safety, reassurance, and precious insight into how to streamline supply chain operations.
Using too many solutions in your software ecosystem can get in the way of risk management, especially if you keep business data in disparate systems.
Invest in a comprehensive solution that maintains all of your data in a well-organized, centralized, single warehouse to make it easier to harness data analytics, predictive insights, and data sharing.
What Are the Benefits of Supply Chain Risk Management Software?
Supply chain risk management tools help you track and maintain your supply chain sustainability. These tools can make order intake, shipping, ordering supplies, and taking inventory much more efficient.
As more pieces of your supply chain become cloud-based or automated, using software to manage your supply chain risk management program becomes increasingly necessary. Unfortunately, older techniques and strategies aren’t equipped to navigate the speed at which these technologies advance.
This software can give you a competitive edge in a crowded market. It can centralize your workflows, improve stakeholder communication, and help protect you from risks you don’t even know yet exist.
All that said, supply chain risk management software can also benefit your company beyond its intended purpose.
For example, supply chain management software can help minimize shipping times by allowing you to track the process from beginning to end. In addition, the metrics you can gather from these programs help your company achieve its long-term goals for product volume, customer satisfaction, and related issues.
Many supply chain software options are scalable and cover multiple functions. It’s ideal if you can centralize and streamline your processes for the entire lifecycle of your supply chain, from demand to delivery.
Artificial intelligence and advanced analytics in many programs allow you to create more accurate predictions about supply availability, logistics bottlenecks, and related issues. The insights help you predict risk before it becomes a severe threat.
Integrating real-time data into your strategy also allows you to track changes in weather, infrastructure, and other concerns that could affect your supply chain. The more information you have, the greater your ability to create contingency plans to protect you in an emergency.
Supply Chain Risk Management Tools
There are several types of tools you can use for effective supply chain risk management.
An up-to-date, detailed map of supplier relationships is important in any supply chain risk management program, as risk professionals use it to gain insights to effectively monitor and mitigate supply chain risk.
Mapping tier 1 suppliers is relatively simple, but if you want true visibility, you’ll also have to map the suppliers’ suppliers. Expectedly, these maps can get very complex very quickly, and relying on your employees solely to create and maintain them might lead to errors and missed connections.
Technology companies, such as IBM and Achilles, offer AI-based solutions to map global supply chains and automatically identify potential risks.
It’s equally important to note that digital supply chains also pose risks and require mapping. You need mapping solutions that use externally available data to map digital supply chains to effectively detect fourth- and fifth-tier connections and failure points that are likely to increase risk.
Environmental Risk Tools
Organizations are leveraging artificial intelligence and big data to predict and respond to weather events faster and facilitate effective decision-making. This involves using a combination of forecasting data, real-time updates on infrastructure status, historical data, and compliance elements to gain faster and more detailed risk insights that weren’t possible before.
Ideally, you should implement environmental risk solutions that let you track the environmental risks affecting shipments. Riskpulse, for example, quantifies the risk with a numerical score on a scale from 1-25 and continuously updates it to help users predict in real-time whether shipments along with the supply chains are likely to be delayed due to bad weather.
Code Verification Tools
Poor coding by software vendors can result in software vulnerabilities, which cybercriminals can leverage to orchestrate supply chain attacks. In fact, vulnerabilities introduced by third-party code are one of the greatest risks within a digital supply chain.
To prevent this, it’s important to find and fix these weaknesses before they are exploited.
Generally, you’ll find third-party software exposures listed in the common vulnerabilities and exposure (CVE) database. But you shouldn’t wait for CVE to address it, as cyber criminals usually exploit the vulnerability before it’s published. In other words, cybercriminals can start using the weaknesses in your systems even before they get listed in the database.
Vendor Risk Management Tools
Every business is subject to cyber threats when they are unprepared to defend themselves against data breaches, risk operational disruption, and regulatory violations – and physical or digital supply chains are no exception.
Vendor risk management solutions offer a wide range of automation options and perform timely assessments, helping you manage all aspects of third-party risk management (TPRM).
Most tools offer a choice between pre-made risk assessments or creating your own custom questionnaire. A benefit of these assessments is that the results align with popular cybersecurity frameworks, allowing you to track risk metrics and compliance gaps.
Additionally, some VRM solutions can predict security posture improvements based on remediation efforts, allowing you to prioritize the more risky exposures.
Geopolitical Risk Tools
Geopolitical risks and disturbances have a huge impact on supply chain security and continuity. But you can’t really become experts in the complex political realities of the different countries in the world.
That’s why you should use geopolitical risk solutions to help you monitor geopolitical data and detect potential disturbances in raw material availability or security, as well as implement preventive action and maintain the stability of your supply chain operations.
Manage Supply Chain Risk Management With ROAR
Instead of using spreadsheets, adopt an advanced compliance, risk management, and governance platform for your supply chain risk management activities.
It’s crucial to include your supply chain in your overall enterprise risk analysis and ensure that the tools you use to manage the different facets of your company can work in harmony. The Reciprocity® ROAR Platform allows you to streamline risk mitigation and compliance efforts from one easy-to-use program.
Vendor due diligence questionnaires are a breeze with ROAR. It manages the distribution, collection, and aggregates responses. In addition, it will assign a risk rating so you know where to focus your energy.
Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas. By better understanding your risk landscape, you can take action to protect your business from cyberattacks, avoid costly data breaches, and monitor the security posture of your vendors.
ROAR can help you create an enterprise risk management program that works for you, so you can get out of the spreadsheets and back to your company’s goals. Schedule a demo to see how ROAR can improve your supply chain resilience.