Modern Supply Chains Require Effective Risk Management

January 9, 2024 - 11 minutes read

The complexity of today’s supply chains calls for advanced risk management tools.

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Risk management has been utilized in the banking, healthcare, insurance, and construction industries for decades to proactively review and address threats. The fragility of today’s supply chains and the unending list of issues that can disrupt them have brought supply chain risk management to the forefront. Conventional risks from natural disasters, vandalism, and spoilage have been joined by new (and equally unpredictable) risks from cyberattacks, globalization, and outsourcing.

This expanding list makes it essential to apply advanced, logic-based risk management principles to prevent disruptions, with the help of inventory management software and other innovative tools and practices. 

“If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.” – Gary Cohn

What is supply chain risk management?  

Supply chain risk management practices identify and mitigate all risks related to the ongoing supply of goods and services to protect businesses from financial, reputation, or efficiency losses. The basic steps included in a supply chain risk assessment include: 

• Identifying risks: Brainstorming, reviewing historical data, and interviewing employees are effective ways to develop a comprehensive list of physical, operational, and security risks.    
• Assessing the likelihood: How often is a given risk likely to lead to a problem? This important determination can be based on industry data, past trends, or computer modeling.
• Prioritizing risks: Once the potential risks have been identified, relative importance can be determined by assigning numerical values to the severity and likelihood of each threat, then multiplying them to calculate the risk score.
• Developing risk mitigation strategies: After careful review and analysis, plans are established to eliminate or minimize the impact of each risk factor, starting with those deemed most critical.

6 Reasons supply chain risk management is a must-have

Each link in the supply chain, from procurement and storage to shipment and delivery, must work together seamlessly to guarantee customer satisfaction. Each step introduces unique threats that must be mitigated to ensure subsequent processes and end customers are not impacted. The factors that make supply chain risk management important for any size or type of business include:

1. Efficiency

Problems that reduce supply chain efficiency, including stockouts, lost shipments, and labor shortages, can be identified and mitigated through effective risk management. Key supplier relationships are also identified through risk analysis, allowing businesses to focus on building long-term, collaborative partnerships that reduce risk and improve efficiency for both organizations.

Mobile inventory management software and RFID tags improve the flow of goods by tracking and locating items quickly while reducing the risk of errors and optimizing the order fulfillment process. Real-time visibility supports proactive decision-making, timely adjustments to inventory levels, and improved responsiveness to market demand.

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2. Business continuity  

Unexpected events like natural disasters, transportation disruptions, and cyberattacks can have a detrimental impact on business continuity without the right risk management strategy in place. For example, if transportation disruptions are identified as a potential risk, developing transportation alternatives in advance might become a high-priority output of the risk assessment.

Risk management practices also highlight vulnerabilities like single source suppliers and inaccurate forecasting practices that are risky even under ordinary circumstances. The impact of these ongoing risks can be minimized through proactive planning, diversified sourcing strategies, and the implementation of robust contingency plans.

3. Vendor management 

Global supply chains continue to expand the volume of materials and data transferred between companies each day. Increased reliance on raw material, logistics, and shipping suppliers introduces risk factors that must be considered. While building partnerships through supplier relationship management (SRM) practices, you should also assess supplier risks related to:

• Capacity constraints

• Labor shortages and strikes

• Geopolitical factors

• Financial health of suppliers

Vendor risk management (VRM) is a subset of supply chain risk management that focuses exclusively on suppliers and third-party vendors before, during, and after the supplier selection process. Viewing suppliers as an extension of your business puts their financial, security, and regulatory compliance risks into the proper perspective.

4. Lean solutions

Modern inventory control methods like just-in-time (JIT) inventory management improve efficiency and reduce costs by minimizing the number of parts and products stored, transported, and reworked. A pull system based on actual orders and a responsive supply chain prevents the overstocking of raw materials and finished goods. Lean solutions also introduce risk, since the lack of carried inventory makes them more sensitive to minor supply chain disruptions.

The inherent risks of JIT are offset by benefits that reduce risk in other ways. For example, quicker inventory turns minimize the risk of carrying obsolete inventory, and the participatory culture that is developed through JIT, Six Sigma, and other continuous improvement programs leads to consistent reporting of supply chain problems and threats.  

5. Security  

Approximately 11 million customers were affected by supply chain cyber attacks in 2022. A data breach that impacts any link in the supply chain exposes all other links by default. Risk management identifies the most critical threats and vulnerabilities so that tools like antivirus software, encryption, and firewalls can be deployed where they are most helpful.

Supply chain security also encompasses physical security practices used to protect facilities, vehicles, and employees from theft or tampering. Surveillance systems, access controls, and secure transport protocols can be implemented based on risk priority to improve cost and efficiency.

“Supply chains cannot tolerate even 24 hours of disruption. So if you lose your place in the supply chain because of wild behavior you could lose a lot.” – Thomas Friedman

6. Customer satisfaction

Supply chain risk management is a must-have in today’s competitive landscape because it safeguards the quality and timeliness of customer orders. Eliminating supply chain risks prevents surprises like stockouts, supplier shutdowns, and defective products from impacting the customer experience. Risk management practices also improve customer satisfaction by: 

• Maintaining cost and price stability over time

• Detecting and responding to quality issues quickly

• Ensuring on time delivery (OTD) rates are optimized

• Improving customer and vendor supply chain visibility

Brand reputation is enhanced by supply chain risk management since it demonstrates a commitment to the quality and long-term stability that customers value. Identifying and eliminating supply chain threats also demonstrates social responsibility by ensuring ethical practices, sustainable sourcing, and a dedication to minimizing environmental impact.

Supply chain risk management best practices

Supply chain risk management requires a dedication to data-based decision making and continuous improvement to be impactful. The odds of success can be improved by implementing best practices that include:  

• Establishing templates: Standardized risk management tools prevent important steps in the process from being overlooked. Risk assessment templates allow businesses to streamline or automate the analysis as they focus their attention on risk identification (brainstorming) and issue resolution.  
• Preparing for the worst: It may sound ominous, but preparing for worst-case scenarios is a wise business practice since it engenders the development of contingency and recovery plans. Data modeling and predictive analytics are among the software tools that make it easier to simulate the impact of high-risk events like cyberattacks and natural disasters.
• Risk management as a habit: Supply chain risk analysis is of little value when it is only completed once. Market factors, supplier issues, cyber threats, and demand patterns are constantly changing, so supply chain risk management must be an ongoing, repeated process to maximize value.

Supply chain risk management: Final thoughts   

A recent study revealed only 12 percent of companies were sufficiently prepared for global supply chain disruptions. Many companies lack the necessary knowledge or resources to systematically identify and mitigate risk. Inventory management software is a valuable tool for reducing supply chain risk. Real-time visibility and data analytics empower businesses to proactively identify supply chain vulnerabilities, optimize inventory levels, and improve overall resilience.

The cloud-based Agiliron product portfolio supports supply chain risk management with mobile-friendly, scalable solutions that integrate seamlessly with all leading E-commerce applications. Inventory management and warehouse management platforms support operations with real-time data and analysis while our mobile Point of Sale (POS) software allows you to sell in more places but manage from one.

Supply chain risk management puts you in the driver’s seat by identifying issues that are likely to impact your business. Our cloud-based inventory management, warehouse management, and order management software solutions are designed to support valuable risk management practices. Contact us today and let our solution experts explain how you can level up your supply chain reliability, efficiency, and security.

Tags: Business Management