Supply Chain Consultancy

How to reduce risk in supply chain management

9 November 2022

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What is supply chain risk?

Supply chain risk is anything that may disrupt the normal functioning of the supply chain. By identifying the key areas that create the biggest risk for business operations, you can put in place contingencies that mean, should the worst happen, your business doesn’t have to suffer loss of profit and potentially long term damage to brand reputation.

Examples of supply chain risk 

Technology has allowed us to improve information sharing in supply networks to deliver service gains, drive cost efficiencies and reduce inventories. Some sectors have developed significant digital data flows that are intrinsic to their operating models; notably aerospace, automotive and retail. However, this comes with an increased risk of cyberattacks, particularly given the number of suppliers involved both as tier 1 and tier 2 levels in these networks.

Compliance to labour and environmental standards is very much in focus as businesses seek to deliver on environmental, social and governance (ESG) commitments. Not knowing what is happening across the network and accepting false assurances diminishes credibility and may impact revenues. 

Pressure on cash flows is omnipresent but, for many businesses, this has been accentuated by the Covid 19 pandemic and more recently the war in Ukraine. First reactions, such as extending payment terms, may seem viable at the first tier in the network but the knock-on effects are unlikely to reduce vulnerability and risk across a network. Critical points in the network are not necessarily a function of size and without detailed visibility of cash flows, supply could easily be disrupted or shifted to ensure more timely payments.

How to identify areas of risk in the supply chain?

Supply Chain Mapping

Firstly, thinking about your supply chain as a network, rather than just a simple chain is a fundamental starting point; no supply chain is a simple, linear chain of activities. In reality, it is a dynamic network of integrated processes, technologies and people across numerous locations. 

A view of the immediate tier of suppliers should be expanded, ideally in collaboration with these businesses, to qualify points in the network (nodes) and assess their criticality. Using a product’s bill of materials should support this assessment and start to qualify the scale of risks these nodes are subject to, for example, operating in an area with higher probability of flooding or with concerns around trade policy changes.

Whilst qualifying risk across a supply network can be time consuming and difficult, using artificial intelligence (AI) based analytics can provide a step change in capability. Capturing publicly available data and working in collaboration with immediate tier suppliers can quickly help understanding of network connectivity and vulnerabilities. 

Network flows: physical, information and cash

When creating your network map, it’s important to consider all 3 flows in operation across the network: physical, information, and cash. This can help with defining and mapping the network and the interactions that take place within it. It supports a detailed examination of the risk to each flow and the dependencies between them. 

Managing supply chain risks

An exercise to map supply networks and qualify risk, as described, is the first stage in establishing a systematic approach to managing risk. This may indicate that immediate actions are needed but it should not be considered a one-off or set as an annual activity. Accountability for on-going risk management should be assigned with a supporting process that keeps a consistent monitor on what is a dynamic situation. 

Options to manage the risks identified are not likely to be surprising but will need to consider the trade-offs inherent in any supply chain design; service, cost, and capital employed. Typical risk mitigations include:

  • Dual sourcing and expanding the supply base
  • Increasing inventory of critical items
  • Nearshoring of supply base (at least in part)
  • Bringing production in-house
  • Reducing product portfolios
  • Increasing inventories at selected nodes in the network.

Building a more resilient supply network does not mean limiting efficiency; by qualifying risks and understanding trade-offs, the design of the network can be adapted and, in many instances, yield better returns. 

For more information on how we can help you reduce your risk, visit our Supply Chain Risk page.

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