Supply chains and logistical processes are fundamental to countless businesses. From a risk management perspective, there are various considerations when selecting the types of risk management strategies most suitable to safeguard your network.
Risk avoidance, aversion, or mitigation can be crucial, particularly in a global marketplace, where products and components are dispatched internationally from complex distribution points.
What Does Supply Chain Risk Management Involve?
The types of risk management policies you implement will help craft your risk management methodology, where supply chain risk assessments enable businesses to:
- Control and monitor the movement of goods
- Track processes used in production or manufacturing
- Plan and manage procurement and inventory levels
- Organize logistics and distribution
How do you write a risk management policy focused on supply chains? There are two options: either segment your broader organizational risk policy to include a section related to logistics, or create a secondary risk policy concentrating solely on the risks embedded in your supply chain. Whichever approach you select, risk management can help to control risks linked to reputation, continuity, quality standards, and safety compliance present throughout logistical processes.
Defining Core Supply Chain and Logistical Risks
Splitting risks into categories can help streamline your responses and determine which risks require immediate attention.
Internal supply chain risks include any potential outcome that arises from within the organizational structure, including:
- Production risks, such as downtime, poor quality control or substandard outputs
- Employee risks. where key personnel are pivotal to specific functions
- Planning risks, where evaluations or forecasts are inaccurate or of insufficient detail
The absence of risk management is an internal risk where there are no steps to mitigate possibly severe risks or reduce their effects on the business.
External risk is triggered by an event or occurrence outside your business and could be instigated by a customer, supplier, or any participant at any point in your logistics network. Examples of external risks to supply chains could be:
- Demand-related, where a lack of capacity or sudden increases or decreases in demand impact revenues or profitability
- Material risks or supply risks, if components, raw materials, parts, or products do not arrive on time or become unavailable
- Environmental risks, associated with economic, weather, or social scenarios, such as storms delaying cargo vessels
While some external risks may be difficult to forecast or control–such as the COVID-19 pandemic–careful risk management can implement protections, action plans or strategies to help businesses improve agility or their ability to respond quickly. Supplier risks can also be effectively managed by introducing independent audits, quality control procedures, or having standby suppliers ready to pick up the slack.
Common Risks Affecting Logistics and Supply Chains
Because a supply chain necessarily has multiple contributors, there may be myriad risks, where a systematic approach is essential to correctly identify, quantify and manage risks. Below, we’ll run through some of the most frequent risks supply chain managers need to navigate.
Many markets experience price volatility, which could relate to input costs such as utilities or raw materials, or the achievable price they can charge for their product or service. Identifying this risk and adopting a forward-thinking attitude to financial modelling and profitability projections can help identify potential shortages to create a response plan.
Stock shortages or the lack of availability of an important part or component may be a significant risk. Unexpected long-term shortages can make it difficult or too costly to maintain current production techniques or continue manufacturing a certain item.
Late deliveries, missing shipments, or damaged palletized goods are one of the typical risks in supply chain management, where businesses need to track and record events to ensure they have clarity over where these risks are most likely to arise.
Supply shocks can be difficult to control and often relate to natural disasters or trade disputes. Still, risk management provides the tools and oversight to predict potential risks before they occur.