From the quick shipment of products to emerging technologies, society is moving faster than ever. Despite these rapid technological advancements, uncertainties of supply chain disruption still remain. However, taking a proactive approach to address possible disruptions through supply chain risk management can be critical to a successful operation.
Put simply, supply risk management is a business’ ability to bounce back or recover from something that disrupts their supply chain.1 Disruptions can come in many forms from weather-related delays, or manufacturing issues. For example, if there is a shortage for a type of fabric that is used to make athletic clothing, the supplier, wholesaler, and retailer will have to resolve this issue. Businesses should take a “not if, but when” approach when it comes to these risk-related issues. A proactive approach can also help contribute to a more resilient operation.
The initial step to manage supply risk is recognizing that this risk exists, along with identifying the internal or external factors that could impact the supply chain.1 Once businesses acknowledge the importance of managing this risk, there are a few techniques that can help improve how disruptions are handled.
Diversification: If a business is able to spread their assets and services, it is also theoretically spreading out its risk.1 The more risk is spread, the less impact a disruption may have to the overall supply chain. Diversifying third party logistics providers, carriers, and assets, like utilizing different modes of transportation, can help mitigate potential risk to the supply chain. For instance, if there’s a sudden spike in product demand, businesses can rely on their logistics partners to provide additional capacity to increase supply.
Risk Prioritization: Not all risk is created equal. A way to determine the best way to communicate risk could be through the creation of a tier system where businesses can identify first-tier risks, or those that are considered the most important or time-sensitive.2 If a business organizes risk in this way, there is more focus on the most critical areas. It’s similar to a “to-do list,” often ranked in importance from top to bottom. Recognizing and communicating the severity of the risk will allow the entire operation to react appropriately.
Making Risk a Key Performance Indicator (KPI): Seventy-eight percent of overall companies and 90 percent of procurement companies expect their supply chain partners to emphasize more on the importance of risk management over the next two years. When making a decision, quality, cost, and potential risk should be considered. Companies could better measure risk by establishing a metric or by creating a “risk score” or a similar ranking for each option of a business decision, a company could weigh their choices based on risk more clearly.3 Establishing metrics can contribute to performance reporting and uncover opportunities to improve.
These strategies can help provide flexibility within the supply chain and can help businesses recognize to internal and external factors affecting performance. Whether it’s a change in demand or weather-related disruption, a business must be able to modify its strategy immediately when these changes arise.4 There is potential risk involved in almost every choice a business makes. Acknowledging and assessing risk and proper risk management can contribute to the success of an operation.