Managing Supply-Chain Risk
Risk is inevitable in our day-to-day lives, and we all tend to develop our responses to deal with risks based on various situations. Nevertheless, risk cannot be eliminated; however, we can try to curtail the severity of the risk.
In Supplier Risk Management, numerous risks come up — delays from suppliers, production disturbances, natural disasters, theft, shortages and cybersecurity, organizational and operational issues.
The Five Key Supplier Risk Areas Are:
- Supply failure or delay risk — is the risk of complete and possibly permanent supply or service failure or delays in supplying goods or providing a specific service.
- Brand damage — These risks can be disastrous for our brand either due to failure or practices in conflict with our principles, expectations of customers and stakeholders.
- Loss of competitive advantage — The risks of competitive advantage are generally undermined, including theft of intellectual property, counterfeiting, and goods sold on the grey market.
- Price and cost risk — The risk of out-turn costs being higher than anticipated or planned (with or without contractual protection).
- Quality risk — The risks associated with quality failures, poor product or service quality, and latent defects.
A structured approach to supply-chain risk management
A risk-aware culture helps an organization both establish and maintain strong defensive layers against supplier risks, as well as respond more quickly when an unknown risk surface and threatens operations.
- Acknowledgment: Suppliers need to feel empowered to pass on bad news and lessons from mistakes. This openness fosters an environment where it is okay to voice and deal with issues. Culturally, it is critical that the organization not get discouraged or point fingers when a risk event occurs and instead works harmoniously towards a rapid resolution.
- Transparency: Procurement Leaders must clearly define and communicate an organization’s risk tolerance. Risk mitigation often has an associated incremental cost, and so it is important to align on which supplier risks need to be mitigated and which can be borne by the organization. An organization’s culture should also allow for warning signs of both internal and external risks to be openly shared.
- Responsiveness: Suppliers need to be empowered to perceive and react rapidly to external change. This can be enabled by creating an ownership environment, where members feel responsible for the outcome of actions and decisions.
- Respect: Suppliers’ risk appetites should be aligned with an organization so that individuals or groups do not take risks or actions that benefit themselves but harm the broader organization.
Contingency Planning: Accept that certain risks cannot be mitigated. You cannot even plan for them, or even prepare what can be done if this risk arises. This might include:
- Disaster recovery planning
- Maintaining readiness of alternatives
- Switching suppliers
- Switching to a substitute product
- Working with the supplier to recover the situation
- Ceasing or pausing operations or supply
It is important that we adopt the right relationship with the right supplier and for the right reasons. In order to do this effectively, it is indispensable to establish a strong supplier relationship. It will help you to choose the right one and stay in control of the process to a great extent.
The road ahead
Global supply chains are irreversible, as are the supply-chain risks that globalization has brought with it. Organizations must build robust programs for managing both known and unknown supply-chain risks. Procurement managers should also recognize that risk management is not merely about setting up processes and governance models but also entails shifts in culture and mindsets. By employing these approaches, organizations increase their chances of minimizing supply-chain disruptions and crises while capturing the total value of their supply-chain strategies.
