How To Manage Supply Chain RiskJillian Yang
Strategies to manage supply chain risk are an essential component to every manufacturing company’s longevity. Whether you are in the business of manufacturing pharmaceuticals, textiles, plastics, computers, food, or metals, mitigating supply chain risk should be an integral part of your company’s systems. What is supply chain risk? It is the risk of subversion to the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of an item of supply, which disrupts, denies, or degrades the function or operation of a system. Simply put, it is the risk of any kind of disruption to the flow of the supply chain process. There are many distinct types of disruptions that companies can be at risk for, from cyber security breaches to supplier bankruptcy to delays in raw materials due to COVID-19. But with the right knowledge and foresight, strategies can be put in place that help to mitigate known supply chain risks and better predict potential future risks.
Different Types of Supply Chain Risks
Supply chain risk management includes mitigation of everyday risks, as well as extraordinary risks. Effectively managing risk reduces cost and waste and helps ensure a smoothly-run, satisfactory work environment for all involved. Not surprisingly, these factors increase profits and the likelihood of long-term success. There are many different genres of risk, with numerous points along the chain where they can occur.
Known risks can be predicted and are, therefore, easier to quantify and manage. Systems with metrics can be put in place to detect and survey the impact a known risk would have on your business. Analysis of these metrics can then determine the percentage of risk for the best decisions to be made for your organization.
A long-standing, known supply chain risk is supplier bankruptcy. When your product is dependent on a supplier that goes bankrupt, it can be a very costly disruption if a backup plan is not in place. It is imperative that your company has multiple suppliers to depend on for the same raw materials. That way, all your eggs are not in one basket. If one supplier gets into financial trouble, it will not halt production and cause a ripple effect of financial consequences throughout your business. Performing thorough checks on the financial history of suppliers before entering into agreements with them is prudent in mitigating this known risk.
Unknown risks are those that are impossible to forecast. But companies can still take a proactive approach to anticipate them. An unknown risk that all companies participating in the supply chain must plan to contend with is natural disasters. These natural hazards can wreak havoc on the supply chain by closing down production and distribution. The following are threats to be aware of:
- Volcanic eruptions
No one could have predicted the current scope of ramifications the COVID-19 pandemic has had on the supply chain. But if businesses can raise awareness of unknown risks within their company and establish multifaceted contingency plans, they will minimize negative reverberations throughout their organization when unknown risks occur.
Internal supply chain risk refers to disruptions that happen within your company. While sometimes unavoidable, no matter how vigorous your mitigation processes are, these are generally easier to course-correct. Below are some internal risks to be cognizant of:
- Faulty forecasting – This can be a result of poor planning and/or flawed assessments.
- Lack of contingency plan – Businesses must reserve resources, time, and space for unforeseen events and incidental expenses.
- Essential business processes disruption – This is when an issue with workers, management, or communication, prevents the flow of business from continuing as usual.
- Operational disruption – This is the interference of a key step in manufacturing which causes workflow to halt, pause, or slow down.
Getting ahead of internal risks before they erupt is always the best policy for mitigation. Fortunately, in today’s world, there are advanced technological tools available to assist companies in taking a proactive approach. They can predict, identify, and assess risk systematically and generate analytics that provide insight into future prevention.
External supply chain risks are typically more challenging than internal risks. They are harder to predict and more difficult to fix because they frequently require the use of more resources. These are risks that are outside of a company’s prevention control because they happen outside of the company. Some common external supply chain risks are:
- Raw material delivery disruption – When the raw materials your company depends on are delayed or unavailable, production of your product will be disrupted.
- Environmental issues – Complications can arise with the environment, the government, or the social economy that negatively affect the supply chain.
- Supplier Changes – If a sizable change happens with a supplier that your company depends on, it can cause a disruption. An example of this is a transfer of the supplier company’s ownership.
- Miscalculating demand – Sometimes, demand is unpredictable. The COVID-19 pandemic created an enormous demand surge for personal protective equipment that healthcare providers were not prepared for. Other times, demand is miscalculated due to lack of proper acumen.
External risk factors necessitate that multiple emergency plans are in place. Because external risks are outside of an organization’s control, preparedness is even more paramount. Having an established crisis team that can make fundamental decisions when these incidents occur is advantageous.
Supply chain risks are ever-evolving as technology and systems advance. With every innovation, there is also a new risk to work around. Now more than ever, a serious technological risk that companies need to be on guard for is cyber security breaches. Targeted cyber-attacks can lead to a loss of intellectual property or stolen proprietary information. Companies are increasing their security budgets and acquiring more advanced IT protection as a result. ThoughtLab conducted a study of the security practices of 1,200 companies across fourteen different industries throughout sixteen different countries. Their report concludes that in 2021, the average number of data breaches increased by 20.5% from 2020. This number is predicted to rise over the next two years. Unfortunately, as technology advances, so does the sophistication of cyber strikes.
With the proliferation of globalization comes another newer risk – global communication barriers. Without tight communication checkpoints in place, it is easy for gaps in the supply chain to form and create vulnerabilities. Miscommunications on a global scale can have monumental financial consequences.
Adopting a Supply Chain Risk Management Plan
A supply chain risk management plan will allow you to reduce business vulnerabilities by implementing strategies that control both everyday and exceptional risks. An expert 3PL is the best asset your business can employ for risk management. Taking effective and preventative steps for such a vital business component is a huge undertaking that requires the expertise of a seasoned professional. Below are some guidelines that a 3PL can lead your company to implement to stay on top of supply chain risk.
- Identify known and unknown risks.
Each point in the supply chain should be evaluated with precision. The warehousing, suppliers, and distributors should all be thoroughly assessed for risk. This data can then be compiled for analysis.
- Put contingency plans in place.
This step is critical to ensure company resiliency following a disruption. Having these plans in place increases response time and mitigates large-scale loss of resources.
- Foster a company culture that is risk-aware.
It is important that personnel company-wide has an awareness of risk and incentive to do their part in managing it. Creating this type of culture is an essential proactive risk management approach.
- Invest in a multifaceted cyber security framework.
Employees need cyber security awareness training, and your company’s software should contain the most up-to-date cyber defense tools. Cybercriminals have access to the latest IT, so companies must follow suit with robust cyber shielding.
- Conduct checkpoint assessments.
In the digital era we live in, companies can use quick-response, automated systems to monitor and assess risk management. Regularly checking in on your risk management strategies is proactively protecting your company from risks known and unknown, internal, and external.
LogiCare3PL, a BioCare company, delivers customized third-party logistics solutions for specialty pharmaceutical drug makers. We are committed to providing our partners with the most customized solutions. To learn more about partnering with LogiCare3PL, please contact us here.