Supply chain risk management and resiliency are hot-button topics in the industry. However, minute supply chain entities do not understand how resilience relates to risk management and what it means for improving focus on the supply chain. As the supply chain continues to grow in complexity and regulation, the opportunities for problems and other events to impact operations negatively will consequently grow. As a result, supply chain entities need to understand how risk management and resiliency applies to both good and bad situations and how an organization can improve supply chain risk management and resiliency processes.
Role of Supply Chain Risk Management
Risk is defined as anything which may impact a business’s operations, typically in a negative manner. However, this does not necessarily imply that something bad happened. For example, one risk could be a sudden increase in demand for a product. As a result, executives at the company turn to manufacturing and the supply chain in order to increase production. However, what happens if the company is unable to handle this increase in demand and loses customers, integrity, and brand reputation as a result? This is where supply chain risk management comes into play, and resiliency is comparable to the continuation of risk management after addressing a given risk.
What Types of Risk Affect the Supply Chain?
Deloitte has identified many different risks that both Supply Chain and Logistics Directors must understand for effective supply chain management. However, most risks can be categorized into macro environment risks, extended value chain risks, operational risks, and functional risks. Each of these rest categories the specs of Civic parts of the supply chain and relate how is supply chain entity can comprehensively evaluate the potential problems across the entire organization.
Macro environmental risk refers to broad forces that affect the entire business. Extended value chain must follow and center around a given company’s upstream and downstream supply chain partners. Operational risks are those that may occur within a given factory, and functional risks are those that our business functions to support the supply chain entity, such as IT development, financing comment and human resources.
Where Should Supply Chain Risk Management Be Involved?
According to the World Economic Forum, risk management needs to permeate an entire organization from top to bottom and include several key performance indicators. In addition, respondents in a 2012 report found three leading risk concerns among the modern supply chain are: social contract disintegration, inflexible and uncoordinated regulation, and cyber security risk. Ironically, each of these three key concerns relates directly to the types of supply chain risk. Additionally, each concern is directly involved in how an organization responds to the materialization of a problem.
Can Effective Supply Chain Risk Management Eliminate All Risk?
No. Eliminating all risk is simply unrealistic. Risk exists in every part of a supply chain operation. An earthquake could occur. A flood could happen. A company’s domestic location could suddenly go to war, financial markets could collapse, and an executive could theoretically “run off with all the money.”
Obviously, some risks are more likely to happen than others, and a supply chain entity needs to be able to respond to the materialization of a risk through a set, planned course of action. Essentially, the company needs to have a plan for resilience
Focus on Resilience
Resilience is defined by an object’s ability to return to a previous state. For example, a stretched spring-like toy will return to normal size when pressures are released. In the supply chain, resiliency refers to how an organization or other supply chain entity responds to a specific pressure, meets the demands of such pressure, and returns to a pre-pressure state. Ultimately, resiliency is how a supply chain entity continues to exist and maintain productive value as if nothing happened when something did, in fact, occur.
3 Simple Process to Achieve Supply Chain Resilience
Resilience is simply a measure of how quickly a supply chain can respond to a given event, which may involve a natural disaster, increase in customer demand, or a recall, among many others. As the world has become more involved on a global basis, the need for resilience includes many different approaches and responses to potential problems. Furthermore, resilience requires dedication across the entire organization, including IT-based processes, data collection, picking, invoicing, and all other processes. Resilience does not imply an organization must spend millions to effectively manage and mitigate risk. As explained by Rich Becks, resilience can be best exemplified through three approaches.
1. Multi-Tier Visibility
When one part of the supply chain does not have access to data or insight into other tiers, the organization is at risk for the exacerbation of problems within silos, which could result in further problems. As a result, supply chain entities need to have access across an organization’s scope, often by integrating systems such as a TMS to an ERP, which improves decision-making capabilities by providing accessible, credible data for a basis.
2. Real-Time Collaboration
As previously discussed, collaboration between supply chain entities is critical to maintaining efficiency. When something unfortunate occurs, a given entity needs to be able to communicate with external parties, such as suppliers, shippers, or other parties. This level of collaboration allows for adjustments from suppliers and distributors and meet the demands of the specific incident.
For example, a sudden surge in order demands may warrant immediate expansion of contractual requirements for a supplier, and the supplier may need to increase shipments for time period X. Similarly, the distributor would need to increase shipment processes to meet the sudden surge. Essentially, real-time collaboration puts the entire supply chain in a position to respond to a given risk or event.
3. Flexible Response Plan
As mentioned previously, companies need to develop a response plan for specific risk. Yet, every flexible response plan should be tested before a problem occurred. This allows the supply chain entity to adjust the plan to meet a change in how a risk occurs or is perceived. As a result, a supply chain can be more apt to return to the previous, productive state after facing a major disruption.
Risk is part of everyday life for supply chain entities, and supply chain risk management is one of the most important factors in overall effective supply chain management. By understanding how risk management relates to resiliency and its role in effective supply chain management, a company’s supply chain can be better prepared to meet the demands of customers without sacrificing shareholder values or the company’s reputation.