Best Practices for Assessing Supply Chain Risks

Managing supply chain risk is increasingly important in today’s interconnected global economy. The COVID 19 pandemic, geopolitical disruptions, labor shortages, and natural disasters highlight many vulnerabilities present within supply chains around the world.

What Is Supply Chain Risk and Why It Matters?

Supply Risk is the potential disruption to services, goods, information and financial flows between businesses in their supply chain. Supply chain disruptions could occur due to:

• Supplier bankruptcies or a supplier’s failure or bankruptcy of a major supplier
• Shipping, logistics or transportation bottlenecks
• Natural disasters, severe weather events and climate change
• Cyberattacks
• New regulatory requirements or trade barriers imposed by governments
• Quality issues or recalls

If not properly managed, supply chain risks may cause a stoppage of production, decreased sales, increased costs, penalties against company image and brand and in some scenarios a complete loss of the business. In many organizations the assessment of risk indicates more than 75% of businesses will have experienced at least one major disruption to their supply chain in the last two years, many companies report losses of millions of dollars as a result.

Supply Chain Risk Management is, simply put, a discipline to identify, evaluate, manage, and monitor supply chain risk to help organizations maintain an agile and resilient operation.

Key Steps in Effective Supply Chain Risk Management

Risk Identification

To begin with, businesses should develop a comprehensive list of all possible internal and external risks within the supply chain. Risk categories often consist of:

• Supplier Risks such as Financial Stability, Monopolistic Dependency, and Consistent Quality
• Process Risks such as Manufacturing, Inventory and Fulfillment
• Environmental Risks such as Natural Disasters; Climate Change
• Geopolitical Risks such as Trade Policies; Sanctions
• Technology Risks such as Information Technology Failure; Cyber Attacks

Consider forming CrossFunctional Teams made up of members from Sourcing, Operations, IT and Legal in order to achieve a thorough understanding of the risks facing the supply chain.

Risk Assessment

Once all risks have been identified, each risk must be assessed with regards to both its Probability of Occurrence and Impact. Quantifying these risks can be accomplished using a variety of Tools including Risk Matrices, Failure Mode and Effects Analysis and Scenario Modeling, which quantify the Risk in terms of:

• Probability of Occurrence
• Operational such as Lead Time; Capacity Constraints
• Financial such as Increased Cost; Lost Sales

By conducting both Quantitative and Qualitative Assessments of each risk, businesses can prioritise mitigation efforts based on where they will deliver the greatest “return” for the organisation.

Risk Mitigation Planning

Mitigation of supply chain risks is primarily achieved through the identification of risks and the development of mitigation strategies to address those identified risks. These mitigation strategies will ultimately provide organizations with a more manageable level of risk associated with their supply chain.

Monitoring and Reporting

Risk Management is not an event. Rather, it should be a continuous cycle of monitoring through the use of dashboards, key risk indicators, and alerts when threshold levels are exceeded. The Leadership’s Reporting to the Leadership regularly provides the Leadership with adequate attention and resources.

Challenges to Effective Risk Management

Although implementing best practices, companies still have existing barriers. For instance, there are:

• Limited access to realtime data throughout the supply chain.
• Organisational silos that prevent communication between departments.
• Insufficient resources for small and mid sized companies.
• International regulations that create a complicated environment for businesses operating globally.
• Difficulty measuring or assessing risks that are not tangible.

To resolve these issues requires a commitment of both funding and resources for technology and a crossorganizational governance approach.

Future Trends in Supply Chain Risk Management

Global supply chain evolution will see new methods of Risk management evolve as follows;

• AI based Predictive Modeling for Risk
• Digital Twin and Simulation for Stress testing
• Inclusion of Sustainability and ESG Risks
• Enhanced Traceability with Blockchain Capabilities
• Partnership Collaboration with Data Sharing in real time

Together these technologies will enable the early detection of problems, provide deeper insights into issues, and offer More Adaptive Strategies.