supply chain risk management

Supply chain risk management (SCRM)

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Managing supply chain risk is important for every business. But why? And what types of risks should be managed? In this article, Inchainge discusses everything you need to know about supply chain risk management.

What is supply chain risk management (SCRM)?

Supply chain risk management (SCRM) is the process of coordinated and strategic steps to help organizations to identify, access, monitor and mitigate the risk involved in end to end supply chain. This will enable the continuity and profitability of the supply chain.

Why is supply chain risk management important?

The supply chain is crucial for any business as it consists of different activities. It includes the transformation of natural resources, raw materials, and work in progress resources into a finished product that is then delivered to the end customer. Hence, when one process fails to provide what is required on time for the next step in the supply chain, it can disrupt the entire supply chain. Hence, the threat and disruption to the supply chain can cost in terms of the following:

  • Material shortages
  • Reduced revenues with a possibility of impact on market share
  • Cost volatility with a possibility of inflated cost
  • Damaged organization reputation and lower customer confidence

Therefore, a comprehensive SCRM strategy is important for businesses to be resilient and responsive to mitigate the risk involved in supply chain. This involves the management of all types of risk in all tiers of the supply chain (suppliers, logistics, locations and more). When SCRM is implemented well, it will have a significant competitive advantage over other businesses.

What are the types of risks in the global supply chain?

Businesses can limit the impact of supply chain disruption by identifying what risks they are exposed to in their supply chain. In this part, we will discuss different types of risk. Later on, we discuss how to manage those risks and make them part of a supply chain risk management plan. This plan is to model risk management as part of an overall organization continuity plan.

Firstly, the risk can be internal (controllable) or external (uncontrollable). However, the complexity of the supply chain requires an assessment of the types of risk involved and the related factors that causes them. The following picture explains the risks are interrelated:

Source: adapted from Manuj, I. and J.T. Mentzer, (2008) “Global supply chain risk management strategies”, International Journal of Physical Distribution & Logistics Management, Vol. 38, No. 3, pp. 192-223. World Economic Forum (2012) New Models for Addressing Supply Chain and Transport Risk.

  • Supply risks: Impacts any inbound supply where demand is dependent on meeting the requirements in terms of quantity or quality of parts and finished products. This is considered as supply disruption.
  • Demand risks: It relates to outbound supply chain where fluctuation in demand is unexpected and labelled as demand disruption.
  • Operational risk: Risk within a supply chain. The ability to supply parts, service, or finished goods within agreed time, cost, quantity and quality. Transportation is one of them.

Further, the most significant factors impacting these supply chain risks are environmental, geopolitical, economic, and technological. Each of these factors have a probability of impacting the global supply chain and its impact varies.

  • Environmental: An uncontrollable factor with highest probability of occurrence. For example: natural disaster (earthquakes), extreme weathers and pandemic. It is easy to understand and relate a pandemic with COVID-19, where the mitigation remains uncertain and the impact was high.
  • Geopolitical: Geopolitical factors tend to have high probability of occurrence, depending on the region where the business operates. It can vary but supply chain factors have a certain level of influence. For example, trade restrictions by opting alternative strategy or influence over government.
  • Economic: This is the most important and most common supply chain risk factor. For instance: changes in demand, currency fluctuations or price volatility. Often, these economic risks are associated with sudden political or economic changes.
  • Technological: Modern supply chain increasingly relies on technology for delivering the supply chain objectives. Therefore, its management and operations are as important as to any other factor. Any information system failure has great consequences.

How to manage supply chain risk?

Managing supply chain risk from end to end is increasingly important for all kinds of businesses. Having a supply chain continuity plan and having risk management tools in place helps organizations to prepare before a crisis occurs. Managing risk is the best way to mitigate a potential disaster and often part of a risk management solution strategy.

Efficient risk management requires a structured approach to SCRM and it is linked with the type of risks an organization is exposed to. Managing risk involves:

  • Identifying and documenting all possible risk
  • Building a supply chain risk management framework
  • Monitoring risk
  • Placing constant risk review

What are the steps in the risk management process?

The steps involved in risk management helps to understand and mitigate the possible risk. SCRM steps are:

  • Identifying and assessing risk: Requires visibility across the supply chain to have a good understanding of all tiers involved in the supply chain.
  • Quantifying risk: One way is to plot the likelihood of occurrence against business impact and then prioritize accordingly. Further, it can also be assessed against the financial impact and time to recover from any risk.
  • Mitigating risk: There are various mitigating risk strategies that can be employed. For example, increasing use of standard components or dual sourcing to avoid supplier failure. The objective is to have strategies in place that minimize the business disruption.
  • Respond and recovery: The mitigation strategies in place and business continuity plans that are tested are key to speedy recovery.

Want to know more?

Now you know everything about managing supply chain risk. Do you want to experience how to manage supply chain risk by participating in the business simulation games of Inchainge? Have a look at our business games page for more information. Do you want to know more about supply chain management? Have a look at our supply chain management page.