Supply chain risk management (SCRM) is the process of taking strategic steps to identify, monitor, assess and mitigate risks in the supply chain. Some risks are external, such as extreme weather events. Others are internal, such as overreliance on a single supplier.
A comprehensive approach to SCRM involves managing all types of risk, for all tiers of supply and for all risk objects (suppliers, locations, ports and more). When done well, SCRM does more than avoid losses. It provides benefits and creates value for the enterprise.
What You Need to Know About Supply Chain Risk Management
Supply chain risk management serves to protect supply chains from adverse events that could interrupt the flow of goods between companies and their customers. A comprehensive SCRM program includes several phases: identify, monitor, assess and mitigate risk.
To address risk effectively, you first have to identify it. The first phase of risk management is to establish risk profiles for all elements, also called risk objects, in the supply chain.
By actively monitoring the supply chain, you keep risk profiles up to date. Leveraging artificial intelligence (AI) lets companies monitor millions of data sources in real time.
To determine the impact of various risks to the supply chain, you estimate the probability of an event, along with the extent of potential damage should the scenario occur.
Mitigation includes both risk-prevention measures and crisis-response activities. With proactive and reactive plans, companies can reduce or avoid the worst consequences of risk events.
Common Supply Chain Management Risks
Risk of “disruptions in global supply chains for non-food goods” is among the top six current crises identified in the World Economic Forum’s Global Risks Report 2023. Supply chains are susceptible to various categories of risk. Most common among these are financial risk, cyber risk, natural disaster risk, man-made risk, reputational risk and geopolitical risk.
Supply chain financial risk is the possibility that suppliers encounter a business scenario that threatens their financial health. These include revenue and growth outlook, market volatility, bankruptcy and more.
Supply chain cyber risk is the possibility that cyber-related issues such as attacks, data fraud or theft disrupt your supply chain. Weak cybersecurity of supply chain partners can open the door to hackers and other criminals.
Reputational risk is the possibility that a supplier engages in illegal activity, such as child labor or bribery, that negatively affects your brand. Such violations may not be your fault, but they are your problem.
Natural Disaster Risk
Supply chain natural disaster risk is the possibility that weather or another natural hazard interrupts the flow of goods. Four in 10 executives (42%) in PwC’s 26th Annual Global CEO Survey expect climate risk to have a moderate to very large impact on their supply chains.
Supply chain geopolitical risk is the possibility that global political, cultural or socioeconomic events cause disruption. These include revolution, war, trade regulations and tariff conflicts, which can interrupt transport routes or choke trading points.
Supply chain man-made risk is the possibility that events such as fires or explosions disrupt the supply chain. Such events are usually caused by a specific action or inaction within the company facilities.
Importance of a Supply Chain Risk Management Plan
Having a supply chain risk management plan helps safeguard enterprises from the consequences of disruption. These include downtime, lost revenue or loss of market share. Another important reason for supply chain risk management is that is serves to build resilience.
Resilience enables companies to withstand disruption or bounce back when risk events strike. Managing supply chain risks helps companies cope with unexpected events. They are also better equipped to overcome structural challenges that potentially lead to disruption. These include:
Just in Time / Just in Sequence
Running lean supply chains means less wiggle room when things go wrong. By understanding where risks are highest and using predictive insights, companies can have alternatives in place.
Complex supply networks may include thousands of businesses around the globe. Mapping the supply chain on a world map enables companies to visualize risk hotspots at a glance.
Mandates for supply chain due diligence are on the rise, particularly regarding human rights. With visibility across their supply network, companies are better able to uncover incidents of non-compliance.
What are the Benefits of SCRM?
Managing risk helps enterprises reduce or mitigate the consequences of negative events. However, SCRM is about more than avoiding problems. It drives direct and measurable value. Business continuity, supply chain visibility, supplier relationship management, as well as corporate social responsibility (CSR) and compliance, are among the business benefits for the entire enterprise:
With proactive and reactive action plans in place, companies stay up and running during a risk event, or recover faster in the aftermath.
Supply Chain Visibility
Adopting an SCRM solution enables greater visibility. This gives companies the lead time to react to external disruptive forces faster.
Supplier Relationship Management
Automated supplier risk assessments or ad hoc surveys streamline collaboration. Enterprises are able to keep their finger on the pulse of supplier health.
CSR and Compliance
To protect brand reputation, it is vital that everyone in the supply network adheres to ethical and corporate social responsibility (CSR) standards. This includes suppliers and third parties.
Why Is Supply Chain Risk Management Important?
In short, supply chain risk management empowers companies to be better prepared for adverse events that could affect their procurement, production and distribution of goods. By contributing to productivity and continuity, supply chain risk management can boost the bottom line:
Do business better: Understanding risk in the supply chain helps companies make informed decisions. They can develop more effective category strategies, including strategies for raw materials and components.
Gain competitive advantage: With pre-defined action plans and proactive mitigation, risk-aware enterprises can serve customers reliably when competitors cannot.
Support revenue growth: Having sustainable supply chains based on environmental, social and governance (ESG) practices contributes to the company’s long-term economic growth.
Build trust: By managing risk, companies establish processes that strengthen supply chain resilience. This confidence and continuity unite stakeholders, investors and customers.
Being able to manage supply chain risk contributes to the security of nations as well. With Executive Order 14017, the U.S. president focuses on the critical need to “identify ways to secure U.S. supply chains against a wide range of risks and vulnerabilities” for more resilient and secure supply chains.
At every level, organizations that proactively manage risk are less vulnerable to disruption in their supply chains. They have already taken the first step towards greater resilience. Only a resilient supply chain is a competitive one.