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A quick guide to supply chain risk management

14/04/2021 minute read Andrew Pearson

A supply chain can be surprisingly delicate, especially for a smaller business within the manufacturing industry. Many components make up a supply chain, and all it takes is for one of those parts to fail, for the rest of the chain to face significant consequences.  

Despite this fragility, there are some manufacturers that may not have effective supply chain risk management processes in place. However, it’s not too late to do exactly that. We’ve put together a useful guide to help you get started.      

What is supply chain risk management?

Supply chain risk management (SCRM) encompasses any strategy a company uses to deal with risks in its supply chain. There are a variety of methods that can be used to do this.

The objective of SCRM is to identify and eliminate these risks, with the overarching goal of sustaining your business’ existence and prosperity. We’ll come on to the different types of controllable and uncontrollable risks, but the ideal scenario is for your supply chain to be functioning optimally at all times.   

Why is supply chain risk management so important?

The importance of supply chain risk management shouldn’t be underestimated. The vast majority of supply chains face some form of disruption during a typical year. Therefore, not formulating a comprehensive SCRM plan is a perilous approach.   

In the case of small to medium-sized manufacturers, success is largely centred around the sourcing of materials and the production/distribution of products in a timely manner.

If an obstacle were to get in the way of this process, there could be a multitude of knock-on effects (if you’re not sufficiently prepared). The worst outcome from a broken supply chain would be a loss of trust from customers, and ultimately a decrease in sales.

How to carry out a simple supply chain risk assessment 

  1. Identify existing risks

The first step is to identify the risks that exist in your supply chain. It’s easier to do this if you break the supply chain down into each of its separate elements.

You could also categorise the different types of supply chain risks to have even greater clarity. Once you’ve done this, you can make a list of everything that could possibly go wrong, so that nothing goes under the radar.   

  1. Assess the magnitude of each risk

The next stage is to determine how severe each risk is, and the potential damage it could inflict on your supply chain.

You could give each risk a grade so that the order of prioritisation is clear for all. This grade could be determined by the level of impact each risk would have on key performance indicators (such as profitability and overall financial health).

  1. Make plans to tackle the risks

Next, you should detail exactly what action will be taken if each risk comes to fruition. This should also include preventative measures to stop some of the threats from affecting your business in the first place.

Each action should be assigned to a specific employee. Accountability can be key in these scenarios. If nobody is accountable, then it’s likely the action will never be completed.   

  1. Repeat and review

The final step is to repeat the risk assessment periodically. Threats can change, new risks can arise, and members of staff can move on, so it’s important to make this a continuous cycle. It may even be worth reviewing the assessment itself, to ensure it’s not redundant.  

What are the different types of supply chain risks?  

External supply chain risks

External risks to your supply chain are threats that lie beyond the boundaries of your company and are therefore out of your direct control. They can stem from events that are political, environmental and economic.

Another example of an external risk is those posed by suppliers (as you can’t control their behaviour or competency). You can, however, choose who you work with. You should monitor the ongoing activities of any partners. If, for example, you hear that a particular collaborator is having financial troubles, it might be too risky to continue working with them.

There are also demand risks that exist. If an unexpected shift occurs within the industry, it might mean your predictions around necessary stock levels are completely wrong. To counteract this kind of risk, you may need to rethink your inventory management tactics.

Depending on your specific circumstances, it might make more sense to stockpile, so that you’re never left short. Or it could be more sensible to always have minimal stock, to aid cashflow and reduce waste. This is something you’ll need to determine based on the risks you personally face (and the kind of product you provide).  

Internal supply chain risks

Internal supply chain risks are elements that are in your control and therefore fall firmly within the remit of your business. This can include factors like your machinery, logistical processes and employee expertise.  

It’s important to analyse these factors on a regular basis to see if anything can be enhanced. Perhaps the machines and vehicles you use are outdated or faulty. Or maybe members of staff are not performing at the desired level, which could mean extra training is required (or the recruitment process might need scrutiny).

Another internal risk could be poor budgeting or inaccurate financial forecasting, both of which would significantly hinder performance. You should also think about the general efficiency of your business processes. Is there a way your supply chain could be streamlined?

Examples of supply chain risk management methods  

  • Environmental risk management

Environmental supply chain risks have become painfully obvious to manufacturers in recent times. The pandemic continues to cause big disturbances to supply chains, especially for those companies that trade overseas. Local lockdowns have restricted the way businesses operate closer to home too.

You can still plan for environmental risks to some extent, even if you can’t prevent them from happening. As a result of the pandemic, many manufacturers have started sourcing from multiple suppliers, rather than just one. This keeps them safeguarded in the event of one supplier delivering late.   

It may also be time to rethink exactly where you do business, and whether your current strategy is sustainable. In the face of climate change, many manufacturers have started trading more locally. In the event of extreme weather, you’re more likely to fulfil an order that was placed nearby.  

It can be advantageous to adapt your output in reaction to environmental risks too. A shift in the industry could see a new need arise for your customers (a need that you could fulfil with a few changes to your inventory).

  • Cyber supply chain risk management

The adoption of digital tools is crucial for small manufacturers to optimise performance (and to keep up with competitors). But there are some perils that come with this technology, that you must plan for, in order to avoid harm to your supply chain.

You should ensure all employees are well versed in the pitfalls of poor cybersecurity. By enforcing IT best practices across the whole business, you are removing any potential entry points for malicious forces.

Be sure that all computers have appropriate anti-virus software installed, and that these are updated/reviewed regularly. Every company you partner with must be assessed in terms of trustworthiness. And any data you possess should only be shared internally.

It may even be smart to provide levels of access internally too so that only specific personnel can view the most sensitive financial information. This further reduces the chance of a breach.

You should make sure important data is backed up regularly. An accident, or an act of sabotage, could see the loss of crucial information (which could, in turn, be detrimental to your supply chain).

Using a Cloud-based system is beneficial, as they are known for being more secure. Data is stored online rather than in a vulnerable physical location.  

  • PPRR risk management

PPRR stands for prevention, preparedness, response and recovery. This is one of the most well-known risk management methods, and it is one that should be straightforward to implement.

Prevention is all about taking action, in order to stop a problem before it materialises. This is a proactive approach to protecting your supply chain.

The preparedness element is to do with putting contingencies in place for worst-case scenarios. This part of the plan is key, as you are then able to act quickly if your supply chain is dealt a blow.

The response stage is simply putting the contingency plan into action when such an event takes place. And then the recovery phase is doing whatever it takes to get your operations back to normal levels.  

How can software assist supply chain risk management? 

Implementing a sophisticated software solution is good for enhancing all of your business operations, including the management of your supply chain (and the risks that come with it). The benefits that come with such a system include:

Greater visibility

Software provides you with greater awareness around your supply chain, bringing all of your processes into plain view, which only helps with rooting out risks.  

Accurate data

If you use all-encompassing Manufacturing Software, you’ll have instant access to data from all areas of your organisation. This cohesion ensures that information is accurate, up to date and consistent across the business, which consequently affords you greater reporting power.

Powerful reporting

Reporting is the perfect way to identify weaknesses in your supply chain. Perhaps there is a bottleneck being caused by a broken machine. By looking at the data you can find the culprit quickly.

Greater efficiency

Manufacturing Software can help with counteracting external risks too. When dealing with uncontrollable threats, you want your operations to be as smooth as possible, so that you can bounce back quickly. This kind of system does exactly this, by increasing efficiency, eradicating errors, and automating a large portion of your supply chain.    

If you want to implement an effective supply chain risk management plan (with the help of technology), be sure to learn more about our Manufacturing software solutions today.