“Risk permeates supply chains,” writes Adam Robinson, a marketing strategist for Cerasis.[1] You don’t have to remind supply chain risk management professionals of that fact. Supply chain risks come in every flavor and variety. If risk managers start thinking about all the ways supply chains can be disrupted, it’s a wonder they ever sleep or keep down dinner. According to Nick Heinzmann (@n_heinzmann), Editor of Spend Matters, even well-prepared professionals can get queasy. “Something about your supply chain is making you feel like your lunch is about to come back up,” he writes, “and you don’t know why.”[2] He asks, “What is this lurking anxiety you’ve been feeling?” His answer, “You don’t know about all of the risks across your whole supply chain, so you’re not prepared to mitigate or even prevent them. Instead of spending your lunch break crouched over a toilet bowl, you need to take some preventative medicine.”
Top Supply Chain Risks making Professionals Queasy
Even though Heinzmann implies supply chain professionals can identify “all of the risks” that could potentially disrupt their supply chains, he admits, “You have no idea what the next big risk could be.” Nevertheless categories of risk can be identified and actions can be implemented or planned to prevent or mitigate those risks. Robinson identifies eight broad categories of risk every company should consider and plan for. They are:
1. Demand Risks. Robinson writes, “Demand risk refers to the continuous fluctuation of supply and demand in supply chains. Consumer spending habits may change rapidly, and the best demand forecasts do fall short on occasion. … Fortunately, supply chain execs can overcome and successfully mitigate this risk by implementing robust analytics technologies to provide better inventory management and overall supply chain management.” Lora Cecere (@lcecere), founder and CEO of Supply Chain Insights, writes, “While improving forecasting sounds like the right answer, and companies need forecasting capabilities, what I see working today is not as simplistic as improving forecasting.”[3] Because demand forecasting is complicated, a platform that can deal with complexity is required. Cognitive computing systems can handle a large number of variables and greatly increase forecast accuracy as a result.
2. Labor Risks. “Workers’ union, workplace safety, changes in labor regulations and fluctuations with employee turnover and retention can undo a well-versed logistics strategy,” Robinson asserts. “As a result, supply chain execs should monitor current employment projections and changes in economic and private sectors that influence the number of workers likely to be looking for a job with a supply chain company.” Labor risk are one reason automation has become a hot topic.
3. Cyber Risks. According to Robinson, “By the end of 2017, cyber crimes’ costs will exceed $5 billion, and their rate of occurrence is increasing. In supply chains, cyber crimes can range from the theft of personal data to the incorrect or illegal use of proprietary software, technology, information or other tech-based resources.” The Equifax breach will likely increase Robinson’s estimate of how much cyber crimes will cost this year.
4. Natural Disaster Risks. Hurricanes Harvey and Irma and a massive earthquake in Mexico underscored natural disaster risks as only Mother Nature can. Robinson writes, “Hurricanes, floods, tornadoes, and even astrological events, such as solar flare ups, can impact the ability of supply chain entities to transport goods.”
5. Political Risks. “Any discussion on supply chain risks is insufficient and incomplete without touching on political risks,” writes Robinson. “Changing politics of domestic and foreign countries will continue to impact supply chains.” Among political activities that could affect supply chains, he includes: Customs and border protection scrutiny, inspection, and the payment of all necessary taxes, duties, and tariffs.”
6. Market Risks. Market risks are different than demand risks. Robinson explains, “Market risk includes the risk to a company’s brand, reputation and ability to maintain compliance and market exposure to its customers. This risk is amplified through social media, and a single mistake or delay in the transport of goods may result in severe, lasting damage to a company’s brand.”
7. Financial Risks. There are numerous ways financial risks can affect supply chains. Robinson highlights financial risks directly affecting a company, like “financial institutions and banks [failing to provide] funding for either raw materials or finished products.” Other pundits point out, however, that financial risks go beyond a company’s boundaries. Financial failure of a supplier, or even a supplier’s supplier, can create disruption.
8. Scope Change Risks. Robinson writes, “One of the final risks that supply chain executives must consider is changes to supply chains scope and activities. Technically, supply chain scope is defined as the specific activity required to fulfill a given term or obligation within a contract or other service-level agreement. In other words, a freight invoice and contract defines the scope of a given shipment, but natural disasters, resulting in the delay or failure to deliver a product could lead to the addition of other supply chain processes, such as free shipping the shipment, to fulfill the original obligation.”
A good supply chain risk management process will leverage “what if” exercises in each of those areas and prepare responses (i.e., continuity of business plans) should such an incident occur. Even though every possible risk can’t be identified, exercising disaster response plans in each of those areas will ensure people are better equipped to deal with situations, even if those situations are different from those involved in the exercises. Analysts for Source One note, “Thinking ahead to potential problems may lead to solving them. The source pointed out that while some in the supply chain claimed that the much-hyped Y2K computer problems never occurred, and that there had been a lot of money wasted in prepping, it was actually that process of thinking ahead that ensured companies were able to dodge the crash. It’s better to cast a wide net and prepare for unlikely trouble than to assume everything is OK and stumble into a major disruption.”[4]
Some Preventative Medicine for Supply Chain Risks
Heinzmann believes the most important thing a company can do to improve its risk management program is to improve visibility. “Getting a handle on risk,” he writes, “is about how clearly and how much of your total supply chain you can see critical details about.” Edwin Lopez (@EdwinLopezT37), Editor of Supply Chain Dive, insists a separate supply chain risk management group is insufficient. He explains, “It is a team effort.”[5] He adds, “During each crisis, the procurement, logistics and operations departments must all do their part to ensure the chain’s resilience. In turn, each department should have a toolkit to reference when disaster strikes.” At the very least, he explains, each department “requires full visibility, a clear crisis continuity plan crafted by diverse stakeholders, and active communication upon disruption.” To learn more about what those “toolkits” could entail, he points to articles by Rich Weissman (@rich_weissman) for procurement, Deborah Abrams Kaplan (@KaplanInk) for logistics, and Barry Hochfelder (@barryhoch21) for operations. Weissman provides the following advice to supply risk managers, “No matter the planning or the preparation, most of the risk issues are out of your hands. Resolving them, and working through the root cause problems so they don’t reoccur, is not only fun, but also your job.” Being prepared to handle supply chain risks can also make you sleep better and help you keep your food down.
Footnotes
[1] Adam Robinson, “What Supply Chain Risks Must Supply Chain Execs Keep Top of Mind?” Cerasis, 14 September 2017.
[2] Nick Heinzmann, “There’s a Reason Your Supply Chain is Making You Nauseous: You Don’t Know all of the Risks that Dwell Within It,” Spend Matters, 28 August 2017.
[3] Lora Cecere, “Does Better Forecasting Improve Inventory? Why I Don’t Think So Anymore.” Forbes, 29 November 2015.
[4] Staff, “Risk Assessment Essential For Supply Chain Success,” The Strategic Sourcerer, 28 August 2017.
[5] Edwin Lopez, “Supply chain toolkit: How managers prepare for the next crisis,” Supply Chain Dive, 9 May 2017.
