In the ever-evolving world of supply chains, we find ourselves navigating through a complex, delicate, and dynamic landscape. With the added pressures of supporting online shopping and expanding globally, supply chain risks are at an all-time high. As if that wasn’t enough, our thriving economies and diverse lifestyles depend on these very networks. That’s why it’s absolutely vital for supply chain leaders to excel in risk mitigation. Dive into this article as I explore valuable insights on identifying, evaluating, and conquering supply chain risks like a pro.
“The future belongs to the risk-takers, not the comfort-seekers .”Brian Tracy
In the article below, I’ll explain a 3-step process for supply chain risk mitigation: Identify, Assess, Overcome.
1. Identify: ID Potential Risks And Key Risk Indicators In The Supply Chain
The first step in any risk mitigation strategy is to identify potential risks in the supply chain. So to identify these potential risks, I recommend:
- look at key supply chain risk areas that are common to most supply chains.
- develop a risk register where you will document your risks.
- use this risk register to track your risk mitigation status.
- use key risk indicators (KRIs) to identify supply chain risks. These KRIs can serve as early warning signs of potential disruptions in the supply chain.
To detail, see below for a further explanation of potential supply chain risks, key risk indicators, and creating a risk register.
“Risk is just an expensive substitute for information.”Adrian Slywotzky
First, Identify Potential Supply Chain Risks.
Every company’s supply chain is different, but most have many of the same risks as other companies. Also, before you can mitigate risk for your supply chain, you need to first identify the risks. To get started, let’s begin with a common list of supply chain risk areas. For each risk area you can then list specific risks for your supply chain. Below is a list of 10 major supply chain risk areas according to Moody’s Analytics. Also, I have provided a specific example for each risk.
“If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.”Gary Cohn
10 Major Supply Chain Risk Areas
- Poor Supplier Performance: A supplier fails to deliver goods on time. This causes delays in production and delivery to customers.
- Demand Volatility and Uncertainty: A sudden drop in demand for a product leads to excess inventory and increased storage costs.
- Labor Shortage both Internal and with Suppliers: A shortage of skilled workers leads to delays in production and increased labor costs.
- Financial Volatility Affecting Company’s Cash Flow, Costs, Pricing: A sudden increase in the cost of raw materials leads to higher production costs. This in turn reduces profit margins.
- Global Economic Uncertainty: Economic instability in a key market leads to a decrease in demand for a product. As a result, your company has lower sales revenue.
- Unforeseen Government Regulations or Sanctions: New regulations require additional testing or certification for a product. Thus, this leads to delays and increased costs.
- Geopolitical Events like Wars, Civil Unrest, Unstable Governments: Political instability in a key supplier country leads to disruptions in transportation routes. As a result, lead times increas for products.
- Reputational Risks Resulting from Corporate Deficiencies such as Environment, Social, Governance (ESG): Negative publicity about a company’s environmental practices leads to decreased demand for its products.
- Natural and Climate Disasters: A hurricane damages transportation infrastructure, preventing products from being delivered on time.
- Cyber and IT Infrastructure Risk: A cyber attack on a company’s IT systems disrupts communication channels with suppliers and customers. Thus, this leads to delays in production and delivery.
“If you risk nothing, you gain nothing.”Bear Grylls
For more ideas on identifying supply chain risks, see my article 3 Supply Chain Types: Fundamentals And Examples Of Reasons Vulnerable.
Second, Use Supply Chain Key Risk Indicators (KRI) To Aid In Risk Identification.
Supply chain risks are out there whether you do a risk assessment or not. In fact, that should be a motivation for doing a risk assessment – to identify all risks. Indeed, the whole purpose of risk assessments is to uncover potential supply chain risks. Only by knowing the risks, can you take action on the ones that could seriously disrupt your logistics operations.
“Having no problems is the biggest problem of all.”Taiichi Ohno
To help you to better uncover key supply chain risks, you need to look at supply chain key risk indicators (KRI). In many cases these are metrics and very similar to key performance indicators (KPI). The difference is that KRI metrics are there to give you an early warning. Ideally, a KRI will warn you that there is a “clear and present danger” of an impending supply chain disruption. Further, there are many supply chain KRIs that are common to most companies. However, each supply chain can have its own unique KRIs. To list, below are some common supply chain KRI metrics to help you get started with your own list of KRIs.
Example Supply Chain Key Risk Indicators (KRI)
1. Customer Complaints: An increase in customer complaints about product quality or delivery times. This may indicate a problem with a supplier or logistics provider.
2. Vendor Issues: A supplier’s financial instability or inability to meet production deadlines. This may result in delays or disruptions to the supply chain. For more on managing supplier risks, see my article The Strategic Sourcing Process And Data Analysis.
3. Inventory Levels: Low inventory levels may indicate a problem with demand forecasting or supplier performance. On the other hand, high inventory levels may lead to increased storage costs and obsolescence risks. For more on inventory analysis, See my article Better Warehouse And Inventory Analysis.
4. Lead time variability: Inconsistent lead times from suppliers may result in delays and disruptions to production schedules and delivery times.
5. On-time delivery: Late deliveries from suppliers or logistics providers may result in increased costs, lost sales, and decreased customer satisfaction. For more on improving on-time delivery, see my article eCommerce Supply Chain Advice For Reduced Click-To-Delivery Time And Costs.
6. Backorders: High levels of backorders may indicate a problem with demand forecasting or supplier performance. This leads to delays and disruptions in the supply chain.
7. Percent of Accounts Receivables: A high percentage of overdue accounts receivables. This may indicate a problem with customer creditworthiness or disputes over product quality or delivery times. Additionally, this may potentially lead to cash flow issues and increased financial risks.
Third, Use A Risk Register To Document Your Supply Chain Risks.
Once you identify your supply chain risks, you need a document or use a software program to stay on top of these potential issues. Further, you can use this document to track your risk status as you go through the risk mitigation process. Also, I recommend you use a risk register as a foundational risk mitigation document for you to identify, assess, mitigate, and monitor your supply chain risks. During this initial risk identification phase, the risk register just needs a couple of entries. Specifically, all you need to do is assign the risk, describe the nature of the risk, and categorize the risk such as IT risk or supplier risk.
2. Assess Impact: Determine Probability And Prioritize For Risk Mitigation.
Once you have identified potential risks, the next step is to assess their impact on the supply chain. Recommend that this assessment take into account both the probability of the risk occurring and the potential impact it could have on the company’s operations. Risks with a high probability of occurring and a high potential impact should be prioritized for risk mitigation. To determine the probability of a risk occurring, companies can use historical data, industry analysis such as a SWOT analysis, and expert opinions. To detail, the following paragraphs will explain about how you can use a risk matrix to assess risk and assigning the severity of risk,
First, Use A Risk Matrix To Identify The Likelihood And Impact Of Each Risk.
When you do a risk assessment, there are many approaches and in most cases these assessments use some type of risk matrix. For example, the most simple risk matrix consists of a Y axis with degrees of likelihood that the risk could occur. Then on the X axis is the degree that this particular risk impact could adversely affect the supply chain.
Depending on the nature of specific supply chain risk and how much analysis is needed, will determine how much time and how much you should quantify the risk in terms of financial or operational impact. The end result of this part of the analysis is that you assign a value for each risk’s likelihood and impact. For example, if you have a major distribution center in south Florida, you would probably rate a hurricane at a high percentage for both likelihood and impact. Remember for each risk, record in your risk register the degree risk for both its likelihood and its impact.
Second, Assign The Severity Of The Risk
So now you and your team have determined the likelihood and impact for each risk. Now, it is time to prioritize or rank the severity of each risk. This should be straight forward as you have already dug into the details of each risk from a probability and impact perspective. If you have weighted quantitative values for both the risk’s likelihood and impact, you can just multiply them together for each risk.
On the other hand, if you have qualitatively ranked each risk’s impact and likelihood then you will need to do a more subjective prioritization. For example, if the risk has a high likelihood of happening and it has a low impact, you might rank the overall severity of this risk as low or medium depending on your judgment.
You have now completed your initial assessment. The next step is to record the priority or severity of each risk in your risk register and then start reviewing what is the appropriate risk mitigation response for each risk.
“The key to risk management is never putting yourself in a position where you cannot live to fight another day.”Richard S. Fuld, Jr.
3. Overcome: Develop Risk Mitigation Strategies, Implement, Monitor Proactively
Developing resilient risk mitigation strategies and implementing them is the third step in mitigating risk. Examples of risk mitigation strategies can include diversifying suppliers, increasing inventory levels for critical components, or improving communication channels with suppliers. It is also important to create contingency plans and develop rapid response procedures in case of unexpected disruptions.
“It’s better to solve the right problem approximately than to solve the wrong problem exactly.”John Tukey
Monitoring the supply chain proactively is also key to ensuring that potential risks are detected and addressed before they become major problems. To assist with how to best respond to each risk, below is an explanation of different strategies you can assist to avoid or mitigate your supply chain risks.
First, There Are 5 Different Strategies To Mitigate Risk.
Below are five strategies you can use to address each of the risks you have documented in your risk register.
a. Risk Acceptance – Do Nothing.
Basically, you are just accepting the risk. It is either a low severity risk or the mitigation costs are not worth it.
b. Risk Avoidance – Eliminate What Is Cau\sing The Risk.
This is a case where you stop doing the activity to avoid the risk. For example, if you are currently warehousing a hazardous material, you can decide to discontinue storing this hazardous product and thus avoid the risk.
c. Risk Transfer – Have Someone Else Assume The Risk.
Here you decide to either transfer the risk to an insurance company or outsource the activity to a third party. For example, you have an aging warehouse facility, and you elect to outsource the warehouse operation to a 3rd party logistics company. As a result, this avoids both risks and costs to upgrade the facility and operations. For more on outsourcing, see my articles What Is A 3PL? Compare Types, Capabilities, Tech, Best Value and Managed IT Services.
d. Risk Reduction – Ease The Risk Impact.
A company will usually use this strategy if they can identify an acceptable risk level for a high severity risk event or activity. For example, a company may purchase ransomware insurance to reduce the impact of a cyber attack.
e. Risk Mitigation – You Own The Risk And Need To Address.
Here you have looked at all avenues to either avoid or transfer the risk. However, the risk is still not acceptable and you will need to mitigate in some manner. This will mean your company will need to come up with a mitigation plan to address a given risk.
As you identify a risk strategy for each risk, update your risk register. At this stage you will document your risk response and assign an owner for each risk. The owner is who will actually address the risk. Also, identify additional stakeholders if needed. For example, if the decision is to buy ransomware insurance, the insurance department may be the owner and a key stakeholder would be IT.
“One thing that makes it possible to be an optimist is if you have a contingency plan for when all hell breaks loose.”Randy Pausch
Lastly, Implement And Setup Procedures To Continuously Monitor Risks.
Implement Your Risk Mitigation Plan.
Now that you have identified how you are going to mitigate your risks, it is time to implement. Again, use your risk response document as a foundation document to keep track of your risks and to monitor progress. Some of these risks can be eliminated or mitigated quickly, while others may take a long time and be a major corporate investment. The key thing for implementation is that when a mitigation task is complete, review the risk and make updates, to its severity. Obviously, if you have mitigated the risk then the likelihood and impact level should have decreased.
Continuously Monitor Using KRIs And Periodic Reviews.
Also, you should implement a program to continuously monitor your risks. This is where key risk indicators come in handy. If possible, set up a key risk indicator for each of your major risks. You can also incorporate this into your operational key performance indicators (KPI). Regularly monitor your KRIs so that you can proactively minimize or stop risk events from happening. Also, recommend that you periodically meet with stakeholders to review and update your risk register. During these reviews you may add or modify risks. Additionally, you may also make decisions to go forward with new mitigation actions to minimize future disruptions to your supply chain.
For more discussion and references on supply chain risk mitigation, see Solvexia’s 5 Types of Risk Mitigation Strategies for Business Success, Monday’s 4 Practical risk mitigation strategies for your business & What is a Risk Register?.
At their core, supply chains are a thrilling dance of ever-changing dynamics, constantly at the mercy of both internal and external events. Indeed, a single disruption can send shockwaves rippling straight to your customers’ doorstep, while also spawning a cascade of unintended effects throughout the supply chain. So that is precisely why supply chain planning is such a crucial game-changer!
This is where the vital role of supply chain planning comes into play. By steering clear of haphazard supply chain operations, planning paves the way for smooth solutions and risk reduction for companies. Click here to dive into the realm of strategic and tactical supply chain planning. Specifically, we will explore planning for demand, supply, production, integrated business planning, risk mitigation, and strategic network design.
For more insightful articles on supply chains, see SC Tech Insights.
Writer and Supply Chain Tech Expert. Passionate about giving actionable insights on information technology, business, innovation, creativity, and life in general.