Supply chain risk management will help businesses minimize errors and limit negative effects. In this post, Viindoo will provide information on the most effective supply chain risk management process.
1. What is supply chain risk management?
Supply chain risk management is the implementation of many essential strategies to minimize potential risks that can disrupt the supply chain at the enterprise. As a result, the supply chain will be guaranteed to operate continuously and smoothly.
Effective supply chain management will bring positive changes to production and business activities, making the most of its supply chain role and vice versa. Therefore, each enterprise needs to come up with appropriate solutions to identify, manage as well as develop appropriate treatment and alternative plans.
For businesses, effective risk management will increase competitive edges, create a strong foundation and open up a more developed future.
What is supply chain risk management?
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2. Purpose and objectives when managing supply chain risks
Risk management in the supply chain is a must. The purpose of this activity is:
- Shaping and prioritizing the key factors of production.
- Finding out potential points of failure along the supply chain.
- Mapping out the entire supply chain to find out the interdependencies and interactions between each production stage.
When making a plan for supply chain risk management, businesses can achieve the following goals:
- Continuous supply process;
- Prevention for possible domino effects;
- Increased ability to respond to unexpected interruptions;
- Ability to flexibly and quickly solve problems if interruptions occur.
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3. Risks in the supply chain
While building a supply chain management system, businesses have to take strategic steps to identify, evaluate and minimize risks. Two types of risks businesses often face are internal and external risks.
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3.1 Internal supply chain risks
In supply chain risk management, internal risks are the risks that exist within the enterprise, causing adverse effects on the supply chain operation.
Enterprises can use supply chain risk assessment software, in-depth analysis programs or applications of IoT (Internet of Things) to find, detect and monitor risks. With this being done, these risks are perceived to be more manageable than external risks.
Here are some examples of supply chain risks that may occur within the enterprise:
- Planning and controlling risk: This kind of risk occurs because of inaccurate assessments and forecasts or poor production planning and management.
- Mitigation and contingency risk: This kind of risk occurs when businesses do not build contingency plans for possible risks that can cause disruptions to the supply chain.
- Production risk: Production risk happens when a business's supply is disrupted because an important component or step in the production process is not completed on schedule.
- Business risk: Business risk is created by disruptions in terms of personnel, management, reporting and other essential business processes.
When operating a product/service supply chain, businesses must see the big picture as well as anticipate risks to minimize potential disruptions. Enterprises should proactively adapt to any potential problems so that they can promptly provide solutions or implement the most appropriate risk management strategies.
Currently, there are many solutions to identify potential risks. These solutions are:
- Technology solutions that describe, predict, and transform historical data into business insights;
- APIs to collect data, supplier status updates, and external data to provide a real-time overview of your supply chain.
Internal risks found by risk assessment software
3.2 Risks outside the supply chain
Risks outside the supply chain refer to problems that come from outside the business. This type of risk is difficult to predict and requires large resources of the enterprise to control, monitor and resolve.
Here are some external supply chain risks that businesses should know:
- Supply risk: Supply risk exists when raw materials are not delivered or not delivered on time, resulting in disruption to the production and supply of products.
- Demand risk: Demand risk occurs when businesses miscalculate, or do not accurately grasp the needs of the market or customers due to sudden changes in their demands.
- Business risk: This risk occurs only when there are unexpected changes in one of the units on which the business depends on, making it difficult to maintain the supply chain.
- Environmental risks: During the operation of supply chains, enterprises may be affected by changes in the socio-economy or politics environment.
External risks that are difficult for businesses to grasp
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4. Supply chain risk management process in 4 steps
4.1 Identify risks
Risks in the supply chain often come from multiple reasons, even from things that businesses cannot anticipate. However, most risks are preventable and avoidable. Therefore, risk identification is considered an indispensable first step in the plan for supply chain risk management.
First, businesses need to establish a list of possible risks. Then, arrange the risks according to the corresponding group based on the level of impact, or function in the supply chain, etc. Finally, businesses should find the appropriate approaches and solutions for the risks.
To create a complete and accurate risk portfolio, managers need to fully grasp the information in the supply chain. Administrators can perform ways such as collecting opinions, evaluation, reports on purchasing, production, logistics, transportation, demand forecasting, etc.
Identify possible risks in the supply chain
4.2 Risk assessment analysis
With the risk analysis and assessment step, enterprises must assess each risk group, thereby establishing appropriate solutions. Risk assessment helps to find out which activities are most likely to cause problems.
In addition, this helps businesses know the cause, nature, frequency as well as potential impacts of risks on the supply chain. From there, businesses will prioritize and allocate resources to approach and address risks.
The implementation of a risk assessment will normally be based on two main factors, including:
- Determining the impact of risks: Businesses will need to simulate the evolution of risks and measure their consequences for the financial and survival of the business.
- Determining the frequency of risk occurrence: This factor is often difficult to determine without sufficient historical data.
Viindoo will introduce three methods of risk assessment based on analytical models: Fault tree analysis, Event tree analysis (ETA) and Failure Mode Effect Analysis (FMEA).
Fault tree analysis
Fault tree analysis provides a systematic description of the causes leading to each specific risk. By taking a top-down approach, FTA helps find the consequences of causes and reduce risks before it happens.
The FTA diagram will branch out each cause according to the level of impact on the supply chain. Thereby, businesses will understand that any small error can have serious consequences for the entire system in the supply chain.
FTA supply chain risk management approach
Event tree analysis (ETA)
Event tree analysis can identify and evaluate potential risk scenarios for each sequence of events. The ETA method is implemented to determine the progression of the risk and to assess whether the safety system and process can control the risk. Based on this method, from one event is initiated that each ETA can have many different results.
Supply chain risk management methodology ETA
Failure Mode Effect Analysis (FMEA)
FMEA is one of the methods for supply chain risk management by assessing the significance of the risk. The purpose of this method is to prioritize each risk according to each classification group.
To apply this method, businesses need know the following metrics:
- Risk Priority
Then multiply the results of the three metrics above to find the number of priority risks. This parameter is called RPN (Risk Priority Number).
RPN = Occurrence score x Severity score x Detection score
Supply chain risk management methodology FMEA
4.3 Handling risks
Once the risk has been identified, businesses proceed to handle risks based on 4 useful solutions as below
This is to avoid the occurrence of risks which negatively affects the supply chain. For example, a business chooses to stop production if the managers realize that a product has many potential risks and is not profitable. Another example is when businesses replace suppliers if they find they can't guarantee the supply.
Retention is the implementation of efforts to limit the likelihood of a risk becoming a reality, or reducing the magnitude of the risk's impact on the supply chain. This option is often used by businesses for risks that have occurred.
To prevent risks, businesses need to build a contingency plan. For example, an enterprise can cooperate with many suppliers to reduce the risk of shortages because the probability of a series of suppliers not having enough goods at the same time is very low.
Risk sharing is a way in which a business transfers some of the risk to stakeholders outside the supply chain. One of the ways to share risks used by many businesses is to share the cost of product development or insurance.
In addition, businesses can also establish policies with suppliers to clearly define responsibilities once a risk occurs. For example, if goods are stolen during transit, the responsibility lies with the supplier. Or businesses can buy insurance for epidemics, natural disasters, etc.
Accepting risk is the business's realization that handling the risk is the most feasible decision, either for short or long-term.
For example, the final solution is to accept the risk when the business realizes that the problem is not too serious and does not affect the progress of the supply chain or the cost of resolution is greater than the impact that the risk brings.
Taking risks is also a way to manage supply chain risks
4.4 Risk monitoring
It is a fact that supply chains are constantly changing and risks can become more serious and appear more and more. Therefore, enterprises need to continuously monitor and update the situation of risks such as changes in the organization, environment, society, etc. to promptly conjecture, judge as well as offer appropriate solutions.
More importantly, enterprises need to look at risks from different angles, hence considering whether the current solutions to deal with risks are outdated or not. Besides, businesses should also study the risk scenario, update unusual changes into the risk management framework to have the most timely response.
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Risk monitoring in supply chain operations
How can businesses identify supply chain risks?
Businesses can identify supply chain risks by conducting risk assessments, analyzing historical data, engaging in scenario planning, monitoring market trends, and staying informed about industry-specific risks. Collaboration with suppliers and industry partners can also provide valuable insights into potential risks.
What strategies can be used to mitigate supply chain risks?
Strategies to mitigate supply chain risks include diversifying suppliers and sourcing locations, maintaining safety stock or buffer inventory, implementing robust demand forecasting and inventory management practices, establishing backup transportation options, and implementing cybersecurity measures.
How can supply chain visibility help in managing risks?
Supply chain visibility, achieved through real-time tracking and monitoring of inventory, orders, and shipments, plays a critical role in supply chain risk management. It enables businesses to identify potential bottlenecks, respond quickly to disruptions, and make informed decisions to minimize the impact of risks.
How can organizations build resilience in their supply chains?
To build resilience in their supply chains, organizations can develop contingency plans, establish alternative sources of supply, foster strong relationships with suppliers, conduct regular risk assessments, invest in technology and data analytics, and ensure effective communication and collaboration among supply chain partners.
How can businesses prepare for unforeseen supply chain disruptions?
To prepare for unforeseen disruptions, businesses can develop business continuity plans, establish crisis management teams, conduct regular risk assessments, maintain open lines of communication with suppliers, and invest in robust supply chain monitoring systems.
Through the above article, Viindoo hopes that businesses have had more useful information about how to manage supply chain risk. We believe that the application of the above solutions will help businesses save time and costs, as well as always promptly grasp possible risks. Moreover, enterprises could use Supply Chain Management Software to analyze the current chain, predict events and prevent risks effectively.