Supply Chain Risk Management

Supply chain risk management

Supply Chain Risk Management is the risk assessment and risk mitigation of the overall supply chain right from raw material procurement to final product dispatch to the customers. Supply chain risk management is an essential factor in any organization in order to maintain a perfect balance between demand and supply. Any disruption in the supply chain may cause a delay in product delivery to customers, loss in market share, or bad reputation in the market.

Supply Chain Risk Management

There are many ways to control and mitigate the risk involved in the supply chain, we will cover details of Supply Chain Risks in this blog post, stay tuned!

Supply chain risk examples

Supply chain risk examples are,

  1. Delayed shipment or wrong shipment
  2. Theft or security lapse at the warehouse or during transportation
  3. Damaged shipment
  4. Adulteration in food/medicine items
  5. Improper handling of perishable items
  6. Violation of AEO, CTPAT, TAPA
  7. Failure in meeting legal and regulatory compliance
  8. Failure in meeting import/export regulation
  9. Improper cargo management
  10. Failure in protecting business information, theft of data, or loss of business data
  11. Over inventory or lack of inventory (shortage)
  12. An improper balance between supply and demand cycle
  13. Supply of counterfeit products instead of genuine parts or products
  14. Lack of supply due to bankruptcy of supplier or dealer
  15. Loss of market share, bad reputation in market
  16. Long lead time in supply or high waiting time to get product delivered

What is supply chain risk?

Supply Chain Risks are the vulnerabilities of the errors or the problem that may occur in the Supply Chain. Supply chain risks can arise due to financial issues of suppliers or distributors, recall of products, rework of products, poor quality, production issues due to strikes, poor transportation support, lockdown, pandemic condition (Covid-19)!

A supply chain is a 10 step method, it starts with supply chain risk identification to build a constructive reaction plan. For more details, please refer following steps,

  1. Identification of potential supply chain risk and its sources
  2. Potential Hazard / Risk of supply chain risk
  3. The severity of risk/hazard
  4. Root Cause of supply chain risk/gap in supply chain
  5. Occurrence of problem
  6. Mitigation Plan – Preventive Action or Detection Action
  7. Detection rating
  8. RPN (Risk Priority Number)
  9. Action Plan
  10. Reaction Plan

Yeah! It sounds like a typical FMEA (Failure Mode Effect Analysis). There are many risk assessment methodology/tools which can be used for supply chain risk assessment.

What is supply chain risk assessment & management?

Supply chain risk assessment & management is a key aspect in business in order to reduce/mitigate the risks involved in the production and distribution of a products or a service. It is very important to make a perfect supply chain risk management framework or plan to handle the risk involved in the supply chain and tackle these risks in order to build a smart and sustainable business!

An organization should integrate supply chain risk and management in the Business Continuity Plan.

Sources (Causes) of supply chain risk

There are many factors involved in each business sector that affects the smooth flow of the supply chain. Eg.

a. Pandemic Conditions (ongoing Covid-19 condition)

b. Geographical Risk

c. Poor manpower/labor planning

d. Labor/Worker strike

e. Political Unrest

f. Natural disasters – Earthquake, Tsunami, Flood, heavy rainfall, heavy snowfall.

g. In-efficient warehouse operation

h. Poor inventory control

i. Poor production planning

j. Shortage of raw material

k. Poor financial solvency or bankruptcy of supplier/distributor or dealer

l. Poor product or service quality or product recall

m. Accident / road blockage / sea or traffic disruption

n. Change in statutory/regulatory compliance or requirement

These risks might prevent deliveries, cause delays, damage goods, or somehow affect smooth
flow of supply chain operations. Different types of Supply Chain Risk have different types of sources; for example, the pandemic condition (Covid-19) leads to lockdown, and the stoppage of manufacturing activities, distribution activities, eventually leads to production stoppage.

What are the main categories of supply chain risk?

Major categories of the Supply Chain Risk revolve around internal and external factors. Let’s review each category one by one,

1. Pandemic Conditions (ongoing Covid-19 condition)

The entire world suffered due to the outbreak of the Covid-19 virus since Q1-2020. Lockdown, the shutdown of business, lack of transportation led to disruption in the supply chain. Import and export activities were on hold due to lockdown, restricted use of seaport, and less number of cargo flights.

2. Geographical Risk

Risk induced due to war, logistics legislations, government sanctions, political unrest, agitation, highway/roadblocks, legal issues disrupt the supply chain.

3. Poor manpower/labor planning:

This is an internal issue, good labor/manpower planning helps to achieve product target on time, and eventually it helps to eliminate the risk of delayed production or shortage of supply.

4. Labor/Worker strike:

Conflict between management and workers union leads to strike/agitation at the manufacturing site, reduced production, disrupted the distribution of raw material or finished goods.

5. Political Unrest

Political unrest due to various political reasons ends up with road or highway blockage, agitation, strike, lockdown. Political unrest may be a serious concern if political unrest is due to border issues, war, domestic cold wars.

6. Natural disasters: 

One of the external factors which most of the time beyond the control of manufacturers, suppliers, distributors, and consumers. Any natural disaster, whether it’s a small or significant disaster it affects the distribution of parts / raw material and finished products.

7. In-efficient warehouse operation:

Warehouse operation is the key aspect for inward and outward good flow. Many big organizations outsource warehouse activities to warehouse and transportation companies. Any accidents in the warehouse or warehouse non-functionality lead to supply chain disruptions. Eg. Fire breakouts in the warehouse, warehouse building collapse.

8. Poor inventory control & Poor production planning:

Lack of production planning and poor forecast of sales leads to high inventory or low inventory level of parts / raw materials or finished goods.

9. Shortage of raw material:

Shortage of semiconductors worldwide led to huge set-back to the automotive industry. If the raw material depends on natural sources like crude oil, iron ore, the risk of raw material shortage will always be higher.

10. Poor financial solvency or bankruptcy of supplier/distributor or dealer:

Poor financial solvency or bankruptcy of supplier/distributor or dealer: A supplier or dealer can end up with financial crises or bankruptcy. In such a situation, it leads to a shortage of raw material from suppliers and disruption of product distribution and sale at the dealer.

11. Poor product or service quality or product recall:

Every consumer expects a better quality product and service. A product recall not only affects brand value but also a shortage of products in the market.

12. Accident / road blockage / sea or traffic disruption:

Suez Canal Blockage in 2021 led to severe disruptions to international trade and supply chain. Major or minor accident leads to traffic congestion or highway blockage, this leads to delay in transportation eventually disruption to the supply chain.

13. Change in statutory/regulatory compliance or requirement:

Any internal and national regulation changes may require more stringent product testing or additional regulation of importing certain raw materials or products. Stringent regulation or changes in taxation leads to supply chain disruptions.

14. Poor data flow / Collapse of EDI:

Collapse of Electronic data interface (EDI) leads to loss of data flow between manufacturer and supplier/warehouse ERP system. Advanced shopping intimation/notification does not flow from manufacturer to supplier/warehouse, which leads to delay in material shipment, production stoppage.

How to mitigate Supply Chain Risk (supply chain risk management framework)?

Following steps help to mitigate and eliminate supply chain risk,

  1. Supply chain risk prediction and identification
  2. Supply chain risk evaluation
  3. Supply chain risk assessment
  4. Implementation of corrective and preventive action
  5. Reaction Plan & Business Continuity Plan

The following table helps to identify the risk involved in the supply chain risk, risk evaluation, and risk mitigation.

Risk Prediction & IdentificationRisk EvaluationRisk AssessmentCorrective / Preventive ActionBusiness Continuity Plan & Reaction Plan
Inventory 1. Low level inventory
2. High level inventory
3. Lack of inventory visibility
4. Expired product or near expiry
5. Poor FIFO management
1. Cycle & Wall to wall count program
2. Better visibility and transparency of inventory level by ERP system
Define frequency & KPI of cycle & wall to wall count and monitor it.
Transportation Risk 1. Accident
2. Road Block
3. Delayed shipment
4. Lak of vehicle tracking
5. Lack of transportation visibility
1. Root plan assessment.
2. Implement control tower and GPS enabled vehicle tracking
3. Conduct transporter supplier risk assessment and audit
1. Monthly / Quarterly root plan review
2. On-time delivery
3. Number of road accidents / in year
4. Number of damaged delivery
Financial Risk – Solvency1. Supplier bankruptcy
2. Dealer bankruptcy
1. Review suppliers, distributors, and dealer/retailer’s financial statements.
2. Review liquidity, asset, and liability of the supplier
Set KPI for yearly supplier financial and solvency evaluation
Geographical Risk1. Logistics legislations
2. Government Sanctions
Pandemic Risk1. Covid-19 risk
2. Lockdown
Product Recall1. Brand Reputation
2. Loss of market share
Change in statutory/regulatory compliance1. Changes in import or export regulation
2. Stringent product testing regulation
In-efficient warehouse operation1. Poor management in the warehouse
2. Accidents in the warehouse – Fire Outbreak, Building Collapse etc
Production planning1. Poor production planningSeverity:
Supply chain security management system1. Security lapse in warehouse
2. Security lapse in transportation

Following corrective and preventive measures helps to mitigate risk in the supply chain,

Supplier Diversity and Compliance Contract:

Whether it’s raw material suppliers or service providers like warehouses and transporter, a contractual agreement between supplier and manufacturer is essential.

Financial & Solvency status Review:

It’s a manufacturer’s responsibility to conduct financial checks and solvency checks of suppliers on regular basis.

Inventory Check:

Regular inventory checks at distributors or warehouses must be conducted. Regular cycle count of stock at warehouse helps to keep track of material, it’s the quantity and current location. Wall-to-wall count with 3rd party auditors helps to evaluate warehouse suppliers or distributors’ performance and compliance.

Ethical Behavior & supplier code of conduct:

Supplier code of conduct norms/rules must be defined in contractual agreements like service level, purchase, or in a non-disclosure agreement.

ISO 28000:2007 Supply Chain Security Management System

ISO 28000:2007 Supply Chain Security Management System is also helpful to ensure security in the entire supply chain. This standard is useful to define, implement, sustain and improve a security management system.

Conclusion: Supply Chain Risk Management

Supply chain risk management is the key aspect for all business sectors, whether it’s agricultural business or the aviation sector. Supply chain risk management must be implemented in the organization and must be governed on regular practices as a business continuity plan (BCP).

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