What is Supply Chain Risk Management?
Supply chain risk management helps companies identify and minimize threats that could interrupt access to goods or services vital to the business. Since many companies rely on vendors to provide raw materials, components, or finished products for sale, supply chain issues can cause severe financial hardship for the buyer. Many procurement professionals have adopted supply chain risk management strategies to enable them to anticipate and compensate for such threats.
Types of Supply Chain Risks
The modern supply chain faces a variety of risks, including:
- Supplier failure: When a vendor goes out of business, clients must find a suitable replacement in a short amount of time. Depending on the complexity of the product being sourced, this may be extremely difficult.
- Supply chain interruption: Natural disasters, political strife, and other outside forces can bring supply chains to a halt. Note that your supplier may rely upon other vendors for raw materials, and interruptions to their businesses can have a cascading effect.
- Compliance and regulatory violations: There are many laws and agreements governing supply chain practices. These include anti-corruption statutes, labor regulations, and prohibitions on human trafficking. Vendors who run afoul of these norms can face stiff penalties and/or prosecution.
- Reputational Damage: Bad behavior by vendors throughout your supply chain could come back to haunt you. No business wants to find out that a supplier has been using child labor, putting staff at risk with unsafe working conditions, or violating other important laws.
It’s important to re-emphasize that the risks posed by your vendors’ suppliers can affect your business. The failure of an upstream vendor may put pressure on your own supplier. Likewise, political unrest in a far-flung locale can quickly become relevant to the day-to-day operations of your company. In short, you may have unwittingly built a global supply chain, exposing the company to a number of risks.
How to Identify Supply Chain Risks
Identifying supply chain risks requires a company to perform due diligence on its vendors. At a minimum, many businesses request recent financial statements to demonstrate that a supplier is stable enough to take on new orders. However, this approach does little to uncover risks that have yet to put financial pressure on a company.
The following can help businesses identify supply chain risks:
- Business Credit Scores and Ratings: Pulling a vendor’s credit report can provide timely, unbiased insights into how well the company is doing financially. You may be able to review information about late or delinquent payments, legal judgements, liens, and leadership changes.
- Corporate Family Trees: It’s important to know if your vendor has subsidiary businesses or is owned by a parent company, and whether those relationships expose them to additional (including global) risks. Those enterprises will have risk profiles of their own – issues that could eventually affect your vendor. Business information databases such as D&B Hoovers can help uncover these connections.
- News Updates: The business media can be an important resource for understanding the pressures your suppliers face. Keep an eye on the health of their company and their industry, and make an effort to understand the political and regulatory pressures that may threaten operations.
Business owners should collect as much information on current or potential suppliers as possible in order to understand risks impacting their supply chain.
How to Manage Supply Chain Risks
There are several ways to mitigate risks to your supply chain:
First, and most obvious, is avoiding vendors that represent a high level of risk. There’s little sense in partnering with a supplier if they’ll be a source of constant concern.
Second, many businesses diversify their supply chains as a hedge against risks that could affect any single vendor. For example, a company might source 70% of its gasket seals from one supplier, and 30% from another. Should something happen to the first vendor, the second can keep some materials flowing in. It’s also important to ask these secondary vendors about their ability to ramp up production, as they could contribute even more in a crisis.
Finally, business owners must understand that supply chain risk management is a continuous process. Just because a vendor was in good shape today doesn’t mean they’ll be stable a month from now. The onus is on business owners to monitor their vendors over time for risk.
Choosing a Supply Chain Risk Management Platform
Technology, specifically big data and analytics, offers an elegant solution to information overload. There are multiple business information services that compile data for review, and they can be valuable for risk managers. Before committing to a new technology, consider the following factors:
- Reliability & timeliness of business data. Successfully managing risk requires accurate, up-to-date information. You’ll want to understand the sources of business data so you can have confidence in its relevance. Similarly, last year’s business credit scores are of little help to you today.
- Depth of insights. Anyone can search Google for basic details on a company. The best business information services gather and integrate data from trusted third-party providers, governments, and public financial documents. They offer a deeper and more comprehensive look at vendors, including recent performance indicators. This allows you to better understand their risk profiles.
- Subscription cost. Many business information providers have products at different price points. Make sure that the cost of business data is appropriate for the size of your company. And it’s always important to remember that you get what you pay for, more often than not.
Supply chain risk management is an essential part of protecting your business from local and global procurement threats. Adopting sensible risk management practices is a wise decision that could save money and frustration.