Supply chain plays an important role for businesses operating in today’s dynamic and fast-changing world. However, the biggest challenge for procurement teams is risk management, as it feeds directly into the supply chain success. Numerous events such as natural disasters, accidents, regulatory policies, etc. occur so frequently that they threaten to disrupt operations and weaken the ability to perform efficiently and effectively.
Businesses are exposed at multiple points across the supply chain process, making it difficult to track the range of transactions and further limiting their capability to manage supplier risk. Potential impact, due to poor visibility of risk areas, can be a real threat to companies, causing reduced production and revenues, inflated costs, and even damaging the credibility of investors and stakeholders. Organizations must understand the risks affecting their company and know where to invest; only then can they quickly respond and recover from expensive disruptions.
Supply Chain Risks
As a company’s supply chain grows, the number of threats also seems to increase. More importantly, the organization’s ability to minimize financial risks and mitigate the threats plays a major role in the ability to thrive as an organization. According to IndustryWeek, supply chain disruptions cut the share price of affected companies by 7% on an average. By identifying the risks in the supply chain, companies can limit the impact of disruptions on their business.
Supply chain risks can be predominantly segregated into two main types – external or internal. Let’s see what they are:
External supply chain risks are driven by events that are either downstream or upstream in the supply chain, and companies have no control over them. These include:
Internal supply chain risks enable better opportunities for mitigation as they are within the business’s control. These include:
Threats to the supply chain
A dependence on the fluctuating costs of raw materials, seasons, mineral oil, and other unpredictable costs can cause sizeable disruptions in the supply chain. Any increase in the variable costs for each component or production material leads to an increase in the final retail price that the consumer has to pay.
Non-compliance can have a negative impact on an organization, ranging from the brand image being tarnished in the consumers’ minds and damaging the consumer trust, to the loss of shares, or reputational damage, or damage to personnel by the executives losing their jobs, and huge financial losses. The high-profile hacking incident at a large Retail company dropped their profits by 46%, besides impacting the credit card companies. Preventing cyber security threats is critical for countering the damages of getting hacked. Every relationship along the supply chain has to be vetted to ensure optimum security.
Labor constitutes the largest variable cost in a warehouse. The cost of products can be affected by an increase in the minimum wage level or in worker wage agreements. Similarly, a strike or other work stoppage can take place at any time and bring the supply chain to an absolute halt. A recent example of this threat is the dockworkers’ strike on the west coast of the US, which could cost the US economy billions of dollars per day as 40% of the country’s imported cargo would potentially be affected.
Tornadoes, hurricanes, flooding, earthquakes, and other natural disruptions can be a significant destructive force on the supply chains. A company’s supply chain can be impacted at any time without notice, taking down significant areas and bringing production to a stop. The 2011 flooding in Thailand destroyed over 100 factories and 70% of the production, affecting computer organizations around the world. The impact was felt for over a year-and-a-half.
Political unrest, war, and chaos have a remarkable impact on the supply chain process, shipping routes, and the global trade of parts and products. External threats such as the regulatory environment, political climate, and economic circumstances may affect the material handling equipment, leading to a lack of supply chain visibility.
It is imperative for the supply chain to be compliant with the environmental and safety laws. The FDA, EPA, and many other agencies fine businesses heavily if they fail to comply with the stringent laws. This expense can lead to added supply chain costs that may affect the end consumer.
Organizations must understand the supply risks so they can take effective action in responding to the risks. Companies must focus on building resilience in the supply chain and must address the most vulnerable spots to overcome the threats to profitability. A resilient supply chain reduces the consumers’ perception of assumed risks and gives organizations a competitive advantage in moving from simple risk management to risk-resilient growth. Stay tuned for our next blog post, which will talk about effective measures a business can take to make their supply chain resilient.