Supply Chain Risk Management

A heatwave in California affecting avocado availability around the country.

A labor strike at a supplier factory during a huge product recall.

A supplier going bankrupt and not fulfilling orders.

In each of these cases, an unknown, unmitigated risk has upended the supply chain to varying degrees.

Supply chain risk management is critical to ensure supply chain risk is mitigated. Risks and challenges that can disrupt the supply chain include several areas. Here, we examine some of the most taxing risks and challenges, as well as best practices and risk management techniques.

6 Typical Supply Chain Risks

At a broad level, macro trends and shifts can pose risks for supply chains as a whole. Typical supply chain risks include:

1. New Technology

Technology advancement in supply chain often forces businesses to change systems, altering not only the business process, but also the talent required to oversee it. To be effective, supply chain managers must stay current on emerging technology, its applications and its potential influence on the supply chain. For example, Florida Tech explored how unmanned aerial vehicles are changing retail and healthcare supply chains in a case study

2. Cyber Threats

Along with technology advancement, organizations have increasingly embraced digital systems. While convenient, the switch to digital ushers in vulnerability to cyber attacks to an increasingly connected supply chain. Therefore, it’s essential to practice best practices for cybersecurity in the supply chain as part of your overall supply chain risk management strategy.

3. Natural Disasters

Although inclement weather isn’t a new phenomenon, climate change has altered weather patterns and storms. Weather shifts and natural catastrophes can wreak havoc on supply chains when weather takes suppliers out of commission or interrupts the transportation system. 

4. Political or Region Unrest

When geological regions, whether they are regions, countries, or states, engage in conflicts, closed borders, supply shortages, or infrastructure instability can impede on supply chains. A government collapse can have the same effect, exposing shipments to potential increases in damage, theft or political leverage. International political disagreements on trade policy and tariffs can also cause turmoil in the supply chain.

5. Water Scarcity

On a large scale, dried up or inaccessible eddies or channels used for transportation can halt transportation; droughts can limit labor and production.

6. Data Theft and Fraud

An increasingly digital and interconnected supply chain means more people are involved along the way. A wider network leaves organizations more susceptible to data theft, hacking and spoofing with all the data collected from billing to research and design. 

5 Business Risks From the Supply Chain

On a closer level, business face several critical risks in supply chains, including:

1. Price

Price hikes from suppliers or sudden product price cutting by competitors can leave business scrambling to react.

2. Quality

A breach in quality, whether in the packaging, the transportation, production equipment or the product itself can directly cost businesses money, either in the form of lost profits or increased expenses.

3. Delivery Lapse

Customers may reject product that isn’t delivered on time. In some cases, late delivery can render it useless, such perishable foods or, Forbes suggests, a delayed artwork for an advertising campaign.

4. Legal Issues

Supply chains involve many individuals and often many different countries, all under various regulations. And with each of these players, businesses enter into contracts that, if not drafted correctly, can leave them exposed to risks.

5. Reputation

Thanks to more transparency in the digital age, uncovering unethical suppliers is increasingly easy. However, it can pose a risk to a business’ reputation if consumers are surprised by the relationship. Social obligations, including environmental responsibility, ethical business practices and human rights violations, all play a vital role. 

Supply Chain Risk Management Practices

Supply chain managers should embrace these risk management techniques to optimize the supply chain:

1. Establish longer-term contracts to avoid exposure to price hikes.
2. Employ a quality assurance process, such as Lean Six Sigma, to help streamline processes for efficiency and fewer errors, and encourage suppliers to do the same.
3. Create a contingency plan to boost responsiveness. For example, craft a plan for how to reroute delivery during hurricane season or disperse production in a country with a tenuous political situation.
4. Craft robust contracts with provisions that protect the buyer.
5. Adopt a zero-tolerance stance for illegal activity and train all suppliers and purchasing managers on relevant laws.
6. Demand that all suppliers adhere to the same level of ethical, legal and moral standards the buyer does, and include that position contractually.
7. Empower contract managers to approach their role with innovation and pursue efficiency
8. Conduct due diligence – regularly – of all supplier practices and procedures.

While some risks are known and can be documented, monitored, and addressed via a risk management protocol, according to a McKinsey & Company report, unknown risks must be managed with a “risk-aware culture.” This means that at all levels of the business, employees and managers must be empowered to voice concerns, leaders must be clear and transparent about expectations, and employees must be empowered and respected to take action.

Turning Supply Chain Risks Into Advantages

To mitigate risks, businesses can take them and turn them into a competitive advantage. Walmart accomplished this by taking two key steps, according to Supply Chain Digital.

First, the retailer developed strategic, long-term relationships with core suppliers, enabling longer-term contracts, open transparency and strategy alignment. Second, Walmart championed information sharing, capitalizing on the point-of-sale data available in real-time and informing strategic suppliers about specific SKUs, sale rates and volumes, available shelf space and flattening the inbound process or receiving supply.

McDonald’s is capitalizing on technology to beef up its supply chain, too. By implementing personalization into its menus with software, McDonald’s can adapt menus based on time of day, weather, traffic, and population, as well as suggest complementary items to a customer’s order. While this may create a more interactive customer experience, it also enables data-driven supply and demand to optimize the supply chain by better understanding – and maybe even influencing – customer demand and orders.

Supply chain risk management requires an organization posture that allows for cultural shifts and involves everyone in the responsibility of managing all types of supply chain risks.