Supply chain is the network of all the individuals, organizations, resources, activities and technology involved in the creation and sale of a product, from the delivery of source materials from the supplier to the manufacturer, and eventually delivery to the end user. The key to an efficient supply chain is to make sure that the process runs as smoothly as possible. One needs to follow through each and every step of the process and make sure that things go efficiently and smoothly.
Risk and Vulnerability in Supply Chain
Supply chain risk can be described as the potential loss resulting from a variation in an expected supply chain outcome. It is the mismatch between supply and demand.
Supply chain risk is usually a result of inadequate spend visibility, lack of deep supplier and market information, poor inventory management, poor supplier collaboration, and inefficient coordination heightened by a lack of infrastructure, skills, resources, research, and technology as well as language and cultural barriers.
Supply chain vulnerability can be described as an “exposure to serious disturbance, arising from risks within the supply chain as well as risks external to the supply chain” and as “a condition that is caused by time and relationship dependencies in a company’s activities in a supply chain”.
Vulnerability is therefore seen as a combination of a disturbance and the resulting negative consequence. Such interactions include disruptions caused by strikes, terrorism and natural catastrophes. Any disruption at any stage in a supply chain that can be linked to environmental causes is ascribable to external risks. Together, internal risks and external risks impact the vulnerability of the supply chain
Supply Chain Disruptions and its Impact
Disruptions are defined as major breakdowns in the production or distribution nodes that comprise a supply chain. These may include events such as a fire, a machine breakdown, an unexpected surge in capacity that creates a bottleneck, quality problems, natural disasters, customs delays, or any other number of different problems. Disruptions can be internal, such as a breakdown of vital machinery, or external, such as interruptions to the flow of raw materials or parts of the business.
The impacts of supply chain disruptions could include:
• Inventory management of raw materials and finished goods
• Supplier relations
• Ordering and purchasing
• Sales and revenue
• Marketing aspects including customer relations and business reputation
• Financial management
Ways to Mitigate Risks and Disruptions
1. Maintain additional inventories
Create buffer stock in alternative distribution locations in the event of an emergency so you can continue to satisfy customer demand.
2. Planning for unforeseeable disruptions
Not all supply chain disruptions are predictable. Some freight forwarding or supply chain disruptions are caused by natural disasters, war, terrorism, theft, damage or from data breaches. Businesses that import or export should be prepared with a risk management process to mitigate and minimize the impact of such events.
3. Choosing the right supplier
It is important to choose financially strong and competent suppliers for long-term supplier viability. Thus, be aware of your supplier risks such as regulatory compliance, exposure to economic and political conditions or anything that may impact them in serving you.
4. Engaging a third party logistics provider
By outsourcing your logistics to a third party logistics provider you can heavily reduce the risks associated with managing your own supply chain as well as minimize the cost of having your own resources to manage your logistics.
5. Enhance Visibility
Having a secure supply chain provides a company with the visibility it needs to react and address any issue that may arise. It is reasonable therefore that the harm that potential disruptions pose to daily operations must be equalled by the allocation of sufficient resources to assess threats, take preventative measures and mitigate the resulting damage. Failure to work with suppliers to mitigate threats, prepare and verify an effective response can lead to huge financial losses and in some cases, irreparable damage to an organization.
Other Risk Management Strategies
Postponement involves delaying the scheduled availability of resources to maintain flexibility. Postponement includes labelling, packaging, assembly, and manufacturing. It is applicable both in supply and demand side in high level of demand and supply risk environment.
Speculation is risk management strategy of the demand side. In speculation, everything is planned in advance from buying of raw materials, forward placement of inventory in big markets, and early scheduling of production, all in anticipation of future demand(applicable in low level of demand risk environment).
Hedging is a risk management strategy of supply side, requiring high investment justified only when if a supply chain faces high supply risks. In a global supply chain context, hedging is undertaken by having a globally dispersed portfolio of suppliers and facilities such that a single event (like currency fluctuations or a natural disaster) will not affect all the entities at the same time and/or in the same magnitude (applicable in high level of supply risk environment).
Control, share, or transfer of risks takes the form of vertical integration, contracts, and agreements. Vertical integration increases the ability of a member of a supply chain to control processes, systems, methods, and decisions. Vertical integration may take the form of forward (downstream) or backward (upstream) integration, and is therefore, both a supply side and demand side risk management strategy.
Supply chain security encompasses information systems security, freight breaches, terrorism, vandalism, crime, and sabotage. Security strategy is aimed at increasing a supply chain’s ability to sort out what is moving, and identify unusual or suspicious elements.
Avoidance strategies are adopted by supply chain operating in all types of environment. It can be of two types: Type 1 and Type 2.
Type 1 – Concerned about dropping of some risks by managers in a supply chain who are well aware of the opportunities and trade-offs. It is adopted when a supply chain has an option not to enter a high demand or supply risk environment.
Type 2 – All about reducing frequency and probability of occurrence of a risk event and is adopted when a company has no option but to enter a high demand or supply risk environment.
Any risk to a firm’s supply chain puts the entire financial health of the firm in jeopardy. In the global supply chain environment, risk should be evaluated intently. By addressing risk, companies have a greater chance to pre-empt devastating disruptions in the supply chain and insulate themselves from the ensuing negative effects. Since the supply chain determines the overall financial health of the firm, any risk is magnified in importance. It is essential that firms have a disciplined process in place to identify, prioritize, and manage the risk that can affect the supply chain.