Supply chain risks are becoming a foremost concern for businesses today. Organizations lose millions because of cost volatility, supply disruption, non-compliance fines and incidents that cause damage to the organizational brand and reputation.
For example: corruption, salmonella in the spinach and forced labor in the supply chain can all result in brand-damaging headlines that can cost an organization tens of millions in sales and hundred of millions in brand damage. Reputation may only be essential for name brands whereas cost volatility and supply disruption affect all manufacturers.
According to the 2015 study by the Business Continuity Institute, supply chain disruption doubled in priority relative to other enterprise disruptions (48% of firms are concerned or extremely concerned). 14% had losses from supply chain disruptions (e.g., natural hazards, labor strikes, fires, etc.) that cost over €1 million, and these disruptions can easily go up to nine figures. For instance, Toyota estimates the costs for the Kumamoto earthquakes to be nearly $300 million.
This article provides insights about the major supply chain risks from strategy to performance. The key is to proactively mitigating these risks to ensure a successful supply chain. All companies, without exception need a reminder for the different types of risk, and how to mitigate each. The best way to handle the risks is to first understand the sources and then put strategies in place to mitigate each one:
Selecting the right supply management strategy.
A strategy that’s working for one business doesn’t mean that it will work for another business. For instance, a small business may opt to source locally because they don’t have the resources needed to keep an eye on global suppliers.
As your company grows, it is vital to frequently review such decisions based on the company’s finances and intended growth. Normally, overseas markets usually provide resources at a lower cost, so you may be missing out on interesting opportunities for growth.
Mitigation approach: Firstly, it is important to define the right strategy. The next step is to identify and qualify the right suppliers, using reliable market intelligence to drive decisions.
Brand, compliance, financial and market exposure.
Outsourcing part production or even entire product lines means that you depend largely on your suppliers. In case they deliver a sub-par product, or fail to deliver completely, your customer will be looking to you, not them, for an explanation.
Mitigation approach: The best solution is to identify the product line’s quality standards tolerance, and determine the possible impact of a compromise. The key lies in monitoring those lines closely to detect early-warnings before issues cause havoc with your firm’s brand. This might also affect the ability to meet compliance regulations and impact the bottom line negatively.
Supplier implementation lead-times and production/performance ramp.
Prior to collaborating with a supplier, it is wise to know who you’re working with and what their capacity issues are. For example, working with a supplier for whom your business only represents a fraction of their revenue means you may not get the level of attention that you want.
Mitigation approach: It is a good idea to ramp new suppliers rapidly to acquire early visibility into any risk factors that might obstruct production, lead-times, initial performance, etc.
Ongoing supplier quality and financial issues.
After selecting a supplier, there’s still a lot of work to be done and constant vigilance is needed. It is not necessary to monitor suppliers to ensure quality standards. However, they are subject to many changes that could directly impact your supply chain. For instance, they may encounter threats such as bankruptcies, performance issues, ownership changes, labour strikes and geopolitical changes. All these represents a risk to the smooth functioning of your supply chain. So business owners need to remain on their guard.
Mitigation approach: Continuously monitor all of your suppliers to avoid disruptions caused by bankruptcies, performance issues, ownership changes, labor strikes, geopolitical changes, etc. You may need to tap technology to effectively achieve this level of monitoring.
Demand and inventory fluctuations and challenges.
Another major risk to your supply chain is demand risk. For example, your suppliers may be running low on inventory while still accepting your purchases if they are not supervised properly. This represents a big financial risk and can lead to major disruptions to your supply chain. To prevent such situation, it is important to communicate with your suppliers regularly and also review their status consistently.
Mitigation approach: The solution for such issues is to keep a constant watch on your suppliers to detect signs if they are overwhelmed with new business. It is essential not to let their desire to grow their business affect your commitments.
Risk will always be a part of supply chain. The best way to mitigate the risks is by implementing a comprehensive and proactive approach. Besides, work with your suppliers to define a strategy based on shared business goals. In this way, you will reduce your exposure to risk and the terrible impact it can have. Basically, the best-laid strategies require your team to shift their mind-set and divide their attention equally between cost-reduction efforts and risk mitigation considerations. In the end, the results will be well worth the effort.