6 Types of Supply Chain Risk Management

Supply chain risks always lurk somewhere around, waiting to hit and disrupt businesses. The biggest threat is the unpredictability of the potential risks.

Not just the ongoing COVID-19 that has severely shattered the global supply chain, there have been many issues that have threatened supply chains for years. 

For example, the next supply chain disruption may happen due to an earthquake, a heavy tornado, or a cyber-hacking. This is why organizations need to prepare for any unforeseen events.

For instance, The Global Risks Report 2020 by the World Economic Forum on cyber-related issues suggest that cyber invasions, data theft or frauds are some of the major risks to organizations. An increasing number of enterprises now operate in the digital ecosystem that exposes digital and technological vulnerabilities. At the same time, cyberattacks pose equal threat to suppliers, customers, and managed system providers.

If a disaster strikes at any stage of the supply chain, the major responsibility will be on logistics and procurement professionals. 

These days, supply chain risks are so diverse that it is difficult to prioritize them. In this post, we have identified seven types of supply chain risks, supply chain risk management, and get answer to the question “What is enterprise risk management?”

Here are the six types of supply chain risk management based on Reeves, Levin and Ueda.

• Collapse risk

Is the risk that changes within or outside of the industry will render the business model obsolete. For example the advent of internet and e-commerce, or the success of Tesla and the gradual market shift towards electric vehicles.

• Contagion risk

is the risk that a shock in one part of the economy or business ecosystem spreads rapidly to other parts. This is particularly true because of the global and interconnected supply chains and financial markets. On a smaller scale the risk of a disruption in a supply chain node inside the company that spread through the entire supply chain, like the breakdown or failure of a critical piece of equipment or a strike. Human behavior is perhaps the most difficult to predict. Often supply chains face difficulties due to illness/injury or the exit of key personnel. Sometimes, it may happen due to poor judgment or bad decisions.

• Fat-tail risk

is the risk of large shocks such as natural disasters, terrorisms, political turmoil, or a sudden pandemic. These are black swan events. On a smaller scale this includes the risk of targeted cyber-attacks. A particular type of fat-tail risks are natural disasters such as hailstorms, hurricanes, fire, earthquake, or flood. During the sourcing process, it is critical for a business to assess the environmental risks, and how they will affect suppliers or contractors. Environmental risks are also about an organization’s business impact on air, water, and soil due to emissions, discharges, and other forms of waste, which may attract penalties from authorities.

• Discontinuity risk

is the risk that the business environment evolves abruptly in an unpredictable way. For example the sudden increase of  home-office working. A product or service that was in high demand all of a sudden isn’t required anymore. The opposite can also be true, in which case there is a missed opportunity risk of not being the first to have identified the new business opportunity.

• Obsolescence risk

is the risk that the business incurs when failing to adapt to changing consumer needs, competitive innovations, or altered circumstances. It’s the risk of complacency and missing to notice the evolution of the markets in a certain direction like the frog in the boiling water. The difference between this risk and the previous ones is that this is driven purely by internal failure.

• Rejection risk

is the risk that business partners, consumers, or regulatory agencies reject the business as a partner. During the changes in the regulatory environment to keep up with a new government or due to increasing socio political awareness, many organizations face difficulty in adapting. An organization needs to consider its sourcing efforts, particularly the ones in low-cost countries, to gauge the impact of cultural changes on business operations in a specific environment.  Rejection risks also involve social media campaigns triggered due to mistreatment of customers, as these instances can malign the brand image of an organization.

Conclusion

Understanding, assessing, and forecasting risks related to the supply chain can enable an organization to design a strong strategy to keep those risks at bay. All the mentioned risks and their corresponding action plan are part of the enterprise risk management. When it comes to specific issues regarding the supply chain, it is crucial to mitigate the risks using the right strategies.

Supply chain risk management involves activities including better procurement, process improvement, backup strategies, developing strategic alliances and creating alternative supply sources. These measures will secure supply and protect the reputation of a brand.

Do you wish to learn and detect the underlying risk in your supply chain? Be it financial risk, scheduling risk or human behavioral risk, early detection of these risks and designing an action plan can mitigate them. Learn more by joining our upcoming webinar.