Identifying and Mitigating Supply Chain Risk

Building a resilient supply chain requires a proactive approach to identifying and mitigating risks.

Supply chain professionals grapple with risk on a daily basis. While most transactions proceed smoothly, there are occasions when suppliers fail to deliver due to internal or external factors. Sometimes, suppliers find workarounds to shield customers from potential disruptions, but in other cases, continuity of supply breaks down, forcing the buying organization to seek alternative solutions. Risks in the supply chain can disrupt the flow of goods and services, causing significant repercussions for operational, financial, and customer service performance.

Continuity of supply lies at the core of effective procurement and supply chain management. To mitigate risk and work towards a resilient supply chain, companies must continuously assess supply chain vulnerabilities and employ planning and sourcing tools and techniques to quickly adapt to changes, ensuring business continuity for themselves and their customers.

Supply chain risks can be global, such as political unrest or border closures; domestic, like natural disasters; or local, such as road detours or accidents. Operational risks faced by suppliers encompass capacity constraints, raw material and labor shortages, strikes, currency fluctuations, and even localized flu outbreaks. While these examples vary in their level of risk, they all have the potential to affect scheduled deliveries, business operations, and customer satisfaction throughout the supply chain.

Furthermore, the definition of risk has expanded to include supply chain data security breaches, encompassing acts of terrorism, product and information theft, threats to personnel, and sabotage to critical infrastructure.

Transparency and visibility throughout the entire supply chain are crucial for identifying risks. However, as supplier tiers increase, visibility often diminishes. For instance, a local supplier with reliable performance may rely on a critical source of supply located in a country with frequent disruptions in commerce or transportation. Identifying all risk areas in a supply chain is nearly impossible, and suppliers may be reluctant to share information that could jeopardize their business relationship, creating an information gap that is challenging to bridge.

Companies should be prepared to respond to unexpected disruptions, whether it's a short-term transportation issue due to icy roads or a longer-term supply interruption caused by a natural disaster such as a pandemic. Short-term issues may necessitate simple workarounds or patience, but larger and unforeseen problems require careful preparation, including materials, processes, systems, and personnel. Strategic sourcing strategies should include researching potential risks and developing mitigation plans for critical suppliers.

One way to identify and keep track of supply chain risk is by creating a risk register. This tool is valuable for supply chain management and can be implemented using a simple, shareable spreadsheet to facilitate cross-functional collaboration. When creating a risk register, it is essential to identify all potential risks and categorize them as red (hard stops), yellow (issues that may impact key deliverables or customer commitments), or green (issues that require attention but currently have no immediate impact).

Several key aspects contribute to the creation and maintenance of a risk register. First, identify all areas of risk that could impact continuity of supply, including both tactical and strategic issues. It's important to consider internal factors that might affect supplier performance as well. The list of risks may be extensive and continue to expand as the procurement team focuses on the risk issues across the end-to-end supply chain. Next, quantify the risks using the color-coding system. The risk register is a living document that requires ongoing maintenance. Tactical items may appear and disappear from the list, while strategic issues generally remain. The colors assigned to risks may also change as the risks evolve.

Among the colors, yellow is the most critical in the risk register. Red items receive significant attention and are resolved or worked around to solve the problem. Green items, although identified as important, are not currently causing issues. The yellow items require attention to prevent them from escalating to red and ideally move them toward green or, in some cases, remove them from the list altogether.

Procurement and supply management professionals may reminisce about simpler times when supply chain risks were easily identified and mitigated. However, in today's extended global supply chain, operating within a fragile geopolitical and economic environment, the opportunities for risks to multiply are numerous. Effectively managing risk can be considered a competitive advantage when successfully incorporated into supply chain operations. Proactive planning, rather than reactive management, is crucial to build resilience into global supply chains.