Calculating business risk in the supply chain is essential. Many businesses don’t realise that there is a serious risk of business disruption and reputation damage if they have a lack of knowledge and have done little risk planning when it comes to their supply chain.
Suppliers are considered to be one of the biggest risks to any supply chain and many businesses accept the risks they pose. But, it’s not just supplier risk that businesses need to plan against. There is the threat and possibility of political and economic changes in countries that the supply chain operates in, unforeseen compliance issues, supply chain disruption due to natural disasters and customer pressures about the supply chain and best practices. Find out more about the risks in supply chains in our recent blog article, 10 Risks in International Supply Chains.
Managing risk in a global supply chain therefore means understanding each individual component in the supply chain and its complexities; while understanding the different cultures, languages, values and organisational management strategies of the companies within the supply chain.
Business risk can appear to be convoluted but it is essential for supply chains because businesses are relying on others for their success or failure. It is therefore important for a company to understand that effective supply chain risk management (SCRM) is essential for their business to be successful.
But how do they ensure supply chain and business risk work in unison?
One of the key areas to harness is integrating with supply chain partners to ensure that a business can facilitate real-time visibility and collaborate easily together. Therefore, when disruptions occur in the supply chain a business will have the ability to see, collaborate and resolve these issues with partners in an effective and timely manner. This is the first step to a risk-resistant supply chain. It will also be important to consider technologies and software solutions that use real-time data, analytics and business processes that can provide valuable insight and visibility as well as control over the supply chain.
Many companies use business modelling and analytics to assess and manage risk. There are some companies who will build digital models of the end-to-end supply chain. This allows them to evaluate and compare a variety of different risk scenarios side-by-side and test against each. The testing allows real-world variables to be analysed which leads to better decision making and a better understanding of the supply chain process.
Using business modelling to understand business risk and resilience of the supply chain, usually means carrying out four steps:
1. Assessment – The first step is to identify all risk areas through business modelling and analytics. Once this initial assessment is complete then a comprehensive understanding of the supply chain and the risk associated with it will be understood.
2. Prioritising – Following on from the assessment step it will be important to prioritise different scenarios to test their likelihood and effects using other technologies, software and modelling techniques.
3. Analysing – At this point many businesses will use sensitivity analysis and scenarios to test the supply network design to see what increases resilience. For example, testing may involve seeing the effect of moving the inventory to different locations or changing a supplier relationship.
4. Planning – Finally, strategies will need to be developed for supply chain changes and how these will be implemented. It will also involve the development of any contingency plans for predicted or unplanned disruptive events.
Another method of risk assessment was developed by the Information Security Forum. They developed the Supply Chain Information Risk Assurance Process (Scirap). This process aims to help businesses manage their contracts so that controls, rigour, frequency of evaluation and assurance received are all proportionate to the information risk. The process integrates with a business’s existing supplier management processes and makes supply chain risk management a part of the normal business practice. This process provides a scalable way to manage contracts so that efforts are proportionate to risk.
However a company risk assesses, understanding the resilience of the supply chain is key to understanding and reducing business risk in the supply chain network.
In today’s business environment it is vital that businesses plan against risk. Businesses need to be proactive about supply chain management and focus on their most vulnerable areas. This readiness will only make them more competitive and able to grow their business.