Supply chain risk management involves assessment and problem-solving for all types of risk regarding supply sources and their potential risk areas — including suppliers, third party dependencies, physical locations, and more. Handled properly, supply chain risk management is a part of a company’s enterprise risk management procedure. In this blog, we will outline today’s top risks to the supply chain and review how to strengthen your company’s supply chain risk management response plans.
What Is Supply Chain Risk Management?
Supply chain risk management is the process by which an enterprise takes strategic steps to identify, assess, and mitigate all risks in their business’s end-to-end supply chain. A supply chain risk management plan implements processes after evaluating both everyday and edge case risks along the supply chain, with the ultimate goal of reducing company vulnerabilities and ensuring continuity of business.
Why Is Supply Chain Risk Management Important?
Proper supply chain management is good for business. After all, what is risk management in supply chain optimization about, if not finding efficiencies, cutting costs, and mitigating vulnerabilities? Done well, supply chain management works to implement the most streamlined and least expensive supply chain process for your business within your risk tolerance levels. Doing a thorough risk assessment is mission critical, as the just-in-time nature of today’s business flows means that if any link in the supply chain breaks, the costs can be high in terms of both time and money.
Supply Chain Risks and Challenges in 2022
The extreme interconnectedness of today’s global marketplace means that supply chain troubles can quickly snowball from one industry into the next. Supply chain risk management issues include weather, resource shortages, and technology dependencies — like the chip shortage that has impacted industries ranging from video games to car sales. Shipping container chaos and cybersecurity threats are also on the list of supply chain risk management risk factors to consider.
1: Extreme Weather
The physical logistics of the supply chain mean that storms, icy roads, mudslides, and other extreme weather events can cause significant problems. Unexpected snows in Texas in 2021 caused food supply chain gaps that impacted warehousing, storage, and food delivery to retailers. Another dramatic example is the unforgettable images of the Ever Given container ship stuck sideways in the Suez Canal in March 2021. High winds were blamed for knocking the ship askew and causing the jam. Despite tugboats and diggers working tirelessly to free the ship, it wasn’t pulled free until the seventh day — after a full moon caused a high tide. Once it was out, nearly 400 ships carrying a billion dollars worth of international commerce could finally continue their journey.
2: Technology Dependencies
A microchip shortage started during the beginning of 2020, as consumers created a surge in demand for home electronics — likely due to requirements for remote school and the need to have work-from-home capabilities. The ripple effect caused GM, Ford, Honda, Chrysler, and others to blame 2021’s slowed vehicle production on the chip shortage. Similarly, Sony said the lack of chip availability was the reason why it’s still hard to buy a PlayStation 5 more than a year after the console’s November 2020 launch.
3: Shipping Container Upheavals
As disrupted supply chains and changed routing on a global scale, the flow of shipping containers was drastically changed. Shipping companies found that it was actually more profitable for them to send empty containers back across the ocean for refilling instead of sending back full containers that had been refilled in the United States before being sent back overseas. This disruption to the usual back-and-forth impacted trade and caused massive delivery issues and price increases. A recent study reported that due to changes in the typical container cycle — plus the added issues of congested ports and delayed unloading — a typical container will now spend 20% longer in transit than before the pandemic. In addition, shipping prices on major East-West trade routes jumped by 80% year-over-year — and that is still holding true in January 2022.
4: Cybersecurity Threats
The most common cyber risks associated with supply chain issues are data leaks and malware attacks. Leaks can occur from anywhere, and it’s mission critical that every organization stay current on their information security protocols. Malware attacks can happen through ransomware or viruses, and phishing for information from direct employees or workers at third-party companies may open your company up to exploitation. In late 2021, a former NSA hacker said his top concern is malicious hackers targeting the United States supply chain, as a single attack could disrupt tens of thousands of businesses.
Best Practices for Strengthening Your Supply Chain Risk Management Program
The best way to prepare for the many risks and challenges to the supply chain is to have a solid supply chain risk management framework. Using multiple suppliers, finding closer sources, knowing your risk tolerance, and modeling dire scenarios are all tactics for building a solid risk management plan.
1: Source Multiple Suppliers
The fallout of the pandemic exposed significant gaps in global retail and manufacturing supply chains. When output delays first started, some retailers shifted to multi-source modeling, which creates a system of back-up suppliers if a single supplier loses access to a product. Keeping a supply chain risk management plan top of mind, an important consideration when sourcing suppliers is to look for one that produces out of multiple locations — that way, they aren’t subject to a single point of failure in the case of an environmental event.
2. Need for Nearshore Sources
What is risk management in the supply chain regarding environmental controls? Unfortunately, none of us have superhuman control over the weather — as weather events are a major factor in supply chain logistics. Instead, businesses can problem solve and benefit from finding suppliers and distributors close to their center of operations. This reduces the possibility of delay due to weather issues, since they will have decreased distances of travel for products and components. Many businesses are making this shift, and in 2021 it was reported that Stanley Black & Decker was accelerating plans for two new factories in Mexico and one in Texas. After ports closed and freight costs grew seven-fold, having closer points of supply became important to the toolmaker’s business. Regional suppliers may be more expensive, but reduced travel time and lowered exposure to risk offset those costs.
3: Maintain Inventory Buffers
The just-in-time supply chain creates cost savings by reducing warehousing costs. However, some industry analysts think that businesses have cut too deep in this space and now need to build back stock. The added expense of adopting a “just in case” approach may be worthwhile, as companies are better positioned to maintain product flow and business continuity during unexpected weather events or other rare occurrences thanks to the backup stockpiles.
4: Improve Vendor Visibility
Understanding all parts of your supply chain identifies potential problems before they happen. It’s important to make sure you have good visibility into all of your third party vendors, including their financial standing, and their potential outside dependencies. Review major credit rating agency reports on potential suppliers. Look for technology that provides product and shipment visibility so you can keep yourself — and your customers — current on expected delivery times. Lastly, you should always make sure to undertake a thorough vendor risk assessment before signing any contracts.
5: Model Worst-Case Scenarios
A supply chain risk management framework must take into account what a company’s response will be when the worst happens. Thanks to big data, predictive analytics, and data modeling, companies should have enough information to simulate high-risk events and their impact. Using modeling to forecast nightmare scenarios allows businesses to develop contingency plans, fallbacks, and communication workflows for how to proceed in the event that a disaster strikes.
6. Find Software Solutions
Supply chain risk management software enables companies to get ahead in risk management by improving visibility into a company’s entire supply chain ecosystem. With a better understanding of your supply chain, you’ll be able to quickly determine weak areas and also receive data-driven insights on potential improvements. Using streamlined software and identical technology for different areas of the business also creates improved flexibility in the event of supply chain disruptions.
Implementing cloud-based software throughout your company’s entire network reduces inefficiencies and better positions your business for potential outages due to redundancies and shared data. Another benefit from supply chain risk management software is that it provides complete visibility into a company’s supply chain, allowing business owners and managers to easily spot unusual activity. The upside is obvious in the case of a catastrophic event, but it’s also helpful in the day-to-day, when business leads are looking for areas of opportunity for improved efficiencies, cost savings, and increased profitability.
Ready to Elevate Your Supply Chain Risk Management Program?
Supply chain risk management can be taken on with the help of a risk management software solution, and it’s critical to embark on this effort soon — as today’s many supply chain issues won’t be sailing away anytime soon.