Supply Chain Risk Management
The coordinated efforts of any organization to help to identification, monitor, detect and mitigate threats for continuity and profitability of the supply chain are called Supply Chain Risk Management (SCRM).
Supply Chain Risk Management (SCRM) is a comprehensive approach that involves the management of all types of risks i.e. locations, suppliers, ports, etc.
Supply Chain Risk Management (SCRM) is a critical enabler, which is integrated and embedded in the core process of the organization.
There are so many threats to the supply chain which may include supplier financial issues, material shortages, cost volatility, natural disaster, suppliers’ failures or manmade disasters.
However, Supply Chain Risk Management (SCRM) shall help the organization foresee potential risks and issues as efficiently and spontaneously as possible.
Coordination and collaboration are key factors among the different departments like sales, marketing, production, development, procurement, finance and IT department of the organization for successful Supply Chain Risk Management (SCRM).
The Life Cycle of Supply Chain Risk Management
Ø Risk Identification
- It is essential to make sure that you are identifying the risk in the first place because it is the only way to address risk.
- Establish a risk profile is the first phase of the risk management life cycle.
- After establishing a risk profile, it is important to enact active monitoring to keep it up to date.
Ø Risk Assessment
- Creating depth understanding of what would be the impact of a risk event on your business.
- For instance, it is very important to be aware of those partners who may have a significant impact on sales, margins, or profits.
Ø Risk Mitigation
- This stage defines both action plans, these are preventive action plans and reactive action plans.
- To secure supply and protect the brand, these action plans provide the basis to address risk using appropriate measures.
- Types of Supply Chain Risk Management
Ø Financial Risk
- This is a possibility that the suppliers could lead to encounter a business scenario that could threaten their financial health.
Ø Reputational Risk
- This is a possibility that a brand could be affected by a supplier’s engagement in any negative activity.
Ø Natural Disaster Risk
- This is a possibility that the supply chain could be disrupted by any natural hazard. Such as hurricane, earthquake or any other.
Ø Man-Made Risk
- This is a possibility that involves human action, which disturbs the supply chain process, for instance, fires or explosions.
Ø Geopolitical Risk
- This is a possibility of local or global political events that could disturb the supply chain process.
Ø Cyber Risk
- This is a possibility that the technology used by the supplier may create disturbance and harm business activities.
Increasing Importance of Supply Chain Risk Management
The Strategy of Supply Chain Risk Management
Many members of the supply chain would lose money due to the falling demand for products and services at an alarming rate. Especially in the current economic climate.
The unexpected failure of one supplier could lead to damage to the operations of the company.
Spend Analysis / Spend Visibility
Spend analysis gives an opportunity to procurement executives so that they can prioritize their work. Resulting in the identification of cost reduction component i.e. supply base rationalizing, reducing unnecessary spending, and increasing contract compliance and clear visibility to which supplier should be focused on.
Furthermore, the risk of a supply chain can easily be determined by spend analysis or spend visibility.
Obstacles to Spend Analysis
To the best illustration, it could be observed that the system does not indicate that ABC Pvt. Ltd. is a subsidiary of WYZ Pvt. Ltd. and due to which you would be spending lots of money with XYX Pvt. Ltd. than it should have been.
Furthermore, the status of minor suppliers, quality data and shipment performance from the last 12 months or even debit/credit rating normally does not available within these systems.
A comprehensive spend analysis is not possible simply by bringing data from all systems into a business intelligent system or a spreadsheet, due to the above-mentioned issues.
To get desired results, data need to be error-free and normalized to make it sure that all suppliers are represented in a consistent manner, classified data according to commodity, parent and subsidiary relationship and supplier performance data.
Identifying and Managing Supply Chain Risk
On the one hand, suppliers could be categorized on the basis of commodity, geographically, industry and total spending.
Moreover, it also helps to cluster suppliers by demographic and geographic risks such as currency fluctuations, difficulties in infrastructure, and political issues.
How to tackle Issues of Supply Chain
Spend Analysis ensure procurement organizations to find out low-spend suppliers too to pose risk.
Ø Just in Time / Just in Sequence
JIT / JIS is to run a lean supply chain. A lean supply chain means less capacity or scope when things go wrong.
The growing length and complexity of the supply chain and outsourcing are leaving open gates to more risk.
Ø Brand Reputation
It has become very critical to address issues that may lead to harm brand image due to the increasing influence of social media and more regulations.
Ø Increasing Threats
Threats such as PESTEL i.e. political, economic, social, technological, environmental, legal, which are keep on increasing and so risky too.
For instance more storms, political strife, cyber events, etc.
Importantly in the manufacturing industry, it is more important than ever to manage supplier risk in the currently modernized economy. This is very crucial to lowering the supplier risk by performing deep analysis, manage procurement data and gain supply chain visibility.
According to the Motor & Equipment Manufacturers Association, approximately, 33% of automotive suppliers are in financial distress and the same ratio maybe by the mid of the year.
It is observed historically that procurement organizations have mainly focused on securing high-quality services and products at the lowest cost and now also been tasked to not only evaluate and monitor but also manage the supplier risk. (Supplier Selection Method)
It is essential for procurement executives to have clear visibility into their spending with each and every single supplier at many levels to manage supplier risk.
- How much does the company spend with each supplier?
- Which goods, components or materials are purchased from which supplier?
- Where are from supplier’s shipments coming?
- Who is the original supplier of the company?
- Which are the critical components/material of the company?
- What are the risk metrics of each supplier?
- Which may include legal, financial and operational risk?
- Which components are supplied by which supplier?
- How different suppliers are linked to different tiers?
- What is the fragmentation of components/goods purchased through different suppliers?
Answers of all such questions shall be given and managed by Spend Analysis. The information provided by spend visibility or spend analysis would help to procurement, executives to create a shortlist of target suppliers by categorizing through the industry, spend, geography and commodity, etc.
Spend the analysis allows the procurement organizations to enrich the suppliers’ information by internal supplier performance metrics and external sources which helps procurement executives to perform shortlisted suppliers’ risk assessment.
The starting step to a comprehensive supply chain risk management initiative is the investment in spend analysis.
Mostly, it is misunderstood that spend analysis is just about an ERP (Enterprise resource planning) system with running analytics on top of procurement data.
There are some obstacles to spend analysis which includes:
- In order to get visibility into the overall spend, some of the data need to be within multiple systems that must be aggregated.
- The same supplier and/or product across these systems are often described by different codes. Due to this, the information acquired by multiple systems through aggregated spend may not be accurate.
- An item to an industry-standard classification does not relate to the codes used by the system for that item. Therefore, it comes to be difficult to identify the opportunities to save money by combining spend across goods, suppliers, program locations and aggregate similar and equivalent data.
However, this is critical information for assessing risk.
After all these activities, data analysis shall be performed to obtain a clear picture of all overall spend analysis. SAP is the best example of cleansing, normalization, classification, and analytics of data. (Blockchain in Supply Chain Management)
Once the data has been analyzed, opportunities for cost-saving can be identified, which is called “low-hanging”. For instance, identification of price variance sources, supply-base consolidation or non-compliance of contract and addressing them.
Most importantly, not only supply chain risk can be identified by this, it helps to create a plan to manage those risks as well. Classification or categorization may help to identify those suppliers which are providing critical commodities/parts, sole-source suppliers or suppliers who provide in huge quantity.
On the other hand, these classifications can also help to identify those associated suppliers with a commodity group or an industry that may help to increase exposure cox of quality issues, shortage of labor or goods, fluctuations in prices, environmental and safety hazards, demand and supply imbalances, etc.
Now it’s time to prepare a list of shortlisted suppliers which then need to be further evaluated and monitored for the purpose of risk evaluation.
In the absence of spend analysis tools, procurement executives might sort their suppliers only on the basis of approximate spending with their companies which may result in that only the top 20% of suppliers that make up 80% of spending can be focused on their attention.
However, suppliers with the low-spending should not be ignored as they can also be a source of significant risk. To the best explanation, as the expensive engine may be failed due to a low-quality cheap price part used in it.
Same in the service industry, such as IT provider, if data is theft enabled by the poor security practices may lead to irreparable loss to a brand of the retailer and could lead to lawsuits.
The return from a supplier risk management initiative cannot be measurable until the risk is materialized and avoided loss can be quantified.
Whereas the only possibility is a metric to make some estimation of the impact of supplier risk management activities which take the probability of the expected magnitude of the loss with the risk associated.
To conclude, it is very important to know that in even most successful risk management programs, risk cannot be eliminated fully but the impact of that risk can be minimized or reduced to its optimal least level.