6 MIN READ
This is a guest contribution by Barbadian supply chain professional Wanda Downes. It is an independent piece and is not reflective of the views, thoughts or opinions of the author’s employer.
According to a 2014 SCM World research report ‘Innovative Approaches to Supply Chain Risk’, 59% of businesses have an immature supply chain risk management system. The reasons for this are plentiful, among them are:
The natural conflict between risk management and supply chain efficiency. In other words, we find it difficult to balance the cost or time impacts of risk management systems with having an increasingly efficient chain.
We don’t believe that what we have in place is effective. This is something I have seen firsthand—successful use after implementation is derailed by lack of trust and/or understanding of a system and the importance of your role in the system.
We don’t have the right tools for effective development of a risk management system, such as technology, adequate training or we lack the ability to effectively analyze.
We’re trying to satisfy some audit and therefore complete the basic requirements but go no further as we are very busy with other “stuff” or are understaffed.
Be that as it may, formulating and actioning a good risk management plan will help identify vulnerabilities in your supply chain and minimize the impact of disruptions.
There are four (4) parts to supply chain risk management: identify risks, quantify risks, mitigate risks and respond to risks. But how do we effectively implement and continuously utilize these steps?
Identify risks, quantify risks, mitigate risks, respond to risks
Identify risks
Have a full understanding of your supply chains and their complexity.
A supply chain map will help you get a clear understanding of where exactly your suppliers are based and in turn, how exposed your supply chains are. Creation requires you to engage your suppliers and your suppliers to engage their suppliers and so on, giving you both increased visibility.
While it is good to have alternate suppliers—do you know if your main and alternate suppliers have similar sources for goods or services? If yes, this could leave you in a difficult position if something was to go wrong with that second tier supplier. Also make note of the transport chain involved as your goods make their way between suppliers and ultimately to you.
The video below walks you through how to create a supply chain map using Google Maps. There are also other templates you can find online, such as here.
In this video we're going to walk through how to create a supply chain map using Google Maps. With it, you'll be able to determine if your suppliers are clustered in a particular country or region of the world and therefore assess your location risk.
Understand the type of risk at each point of your supply chain as this will help determine mitigation actions.
Risks fall into three categories: known risks, known-unknown risks and unknown.
Known Risks: foreseeable, shows (typical) variability, consequences known
Known-Unknown Risks: foreseeable, likelihood of occurrence is known, level of consequences may not be known
Unknown Risks: force majeure (greater force)—extraordinary, unforeseen events, consequences unknown
Look at this both internally and externally and consider multiple types of risk. For example, finance risk—have you looked at the financial reports of your suppliers if available publicly? Are they stable or not? If a supplier could no longer supply to you, what will be the financial impact on your company? And what are the risks associated with location of your suppliers? Are they located in an area with yearly monsoons, hurricanes or flooding?
Quantify risks
Sourcing accurate information is key.
Utilizing reliable sources is a necessity to understanding and being able to quantify risks. Ask yourself, internally, is the information supplied between different departments up-to-date and correct? What are my internal information/data checks and balances?
Quantify both financial and process impacts.
A framework similar to the example table below is useful when quantifying these types of impacts and can help clarify what is priority based on score.
Here’s how to use it:
List the risks associated with each of your suppliers for various materials and/or services based on what is known from experience, research or assumption, if unknown.
Assign a numerical value between 1-5 or 1-10 to indicate the level of severity, probability and preparedness. Severity is the level of effect the risk will have on your ability to supply customers, Probability is the likelihood the risk will occur and Preparedness is your state of readiness to mitigate risks. Be consistent when quantifying. If a ‘4’ in your analysis means highly likely to occur, it must mean this all the times to everyone.
Calculate final score for each risk by multiplying the numerical values assigned to severity, probability and preparedness.
Determine which risk is priority based on score. For example, in the table above there should be a plan for each risk however, in the case of material A the risk of political instability associated with Supplier A is the priority because of the highest final score (48) when compared to the other two risks assessed.
Mitigate risks
Mitigation plans depend on what your company determines as risk, as each individual company handles various risks differently. Strategies can be typically grouped into ‘reduce the risk’, ’avoid the risk’, ‘transfer the risk’ or ‘accept the risk’.
In the example table above, the lack of material A will have a high impact on the business (using a scale of 1-5) but while Supplier A has a good standing with delivering quality items, they exist in an unstable political environment. To mitigate, perhaps we can hold extra supplies of material A and have an alternative supplier who may charge a little extra. This effectively reduces the risk and justifies; in this case, a score of ‘4’.
Looking at material B, the company may need to develop plans for mitigation as their preparedness score for the risk of delivery issues is 1—they’re unprepared.
A small sampling of questions you can ask to help create mitigation plans are:
Does your company have a risk awareness culture?
Can you train your employees to improve this aspect if the above question is not a yes?
Have you spoken with your suppliers and customers about contingencies for their country, area or company?
Do you have a plan to hold more materials if needed?
Does your supplier contract language consider risk management?
Who are your alternate suppliers?
Respond to risks
Another big reason why some companies do not have an efficient supply chain risk management system is comfort and inertia. No matter how good your maps, documentation and reviews are, if you are not willing to pull the trigger and action a plan, you have now become a risk to your business. Your supply chain becomes more competitive when the ability to recover from disruption can occur quickly.
Risk management is not a one time exercise. It should be part and parcel of your business operations and should be monitored and reviewed at a determined frequency in order to be effective.
Let’s move forward, learning from current failures and prepare for the future—there are more disruptions to come. Since your supply chain determines how competitive your business is, what are you going to do to protect it? What measures have your local companies taken that may be of benefit, that you are willing to share? Comment below!
WRITTEN BY WANDA DOWNES
Wanda Downes is a believer that companies and individuals that do not have an understanding of supply chain management are missing out on great potential for growth. It’s not just purchasing or logistics!
Ella también está tratando muy duro de aprender español.
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