What are Supply Chain Risks?
A supply chain risk can be described as any unanticipated event that causes the usual flow of materials and goods in a supply chain to be disrupted in some way. Disruptions of this nature can have adverse consequences for the management of operations. For example, they can cause manufacturing delay, resulting in decreased sales in the long run. When considered over a more extended period, supply chain risks can have a detrimental impact on shareholder wealth as well as a company’s long-term financial performance.
Numerous supply chain risks might occur during the course of operations. They are broadly classified as follows-
- External Supply Chain Risks: As the name suggests, these are external disturbances to your organisation’s supply chain. This means they are more difficult to predict and often require additional resources to overcome. External supply chain risks include demand risks and environmental hazards, among others.
- Internal Supply Chain Risks: These are supply chain risk variables that are under your control, can be detected and tracked using supply chain risk assessment software, robust analytics tools, IoT capabilities, etc., and are typically more manageable than external risks. Internal supply chain risks include manufacturing risks, planning risks, data protection risks, and more.
Risks Involved in Supply Chain Management
Risks are an inherent and unavoidable part of the supply chain management. A lack of understanding of hazards in your supply chain can result in increased overall costs and tarnished brand value. Following are the 8 major supply chain risks that you should be prepared to handle-
1. Manufacturing Risks
Manufacturing risks refer to the possibility of a critical component or phase in your production process being hampered, resulting in operations running behind schedule. Numerous factors may be at play here, including the following-
- Prices of commodities and raw materials: A rise in the cost of raw materials increases the cost of production. This frequently forces organisations to increase their prices, badly influencing their buyers and reputation.
- Shortages in raw materials: While businesses are increasingly seeking local or regional manufacturing alternatives for finished products, the production of many crucial raw materials continues to be international. As a result, the supply of certain critical materials is susceptible to disruption due to demand surges or production bottlenecks.
- Disruptions in distribution: The relocation of a large supplier’s activities to another location can considerably influence the cost of raw materials and production. Risk managers should maintain open communication and strong contracts with necessary parties to keep this from taking place.
2. Storage and Transportation Risks
Storage is the process of storing products in warehouses and distribution centres to maintain a constant supply of products in the market. In a warehouse, goods are at risk of theft, damage, or spoilage. If not appropriately addressed, this can devastate the entire inventory planning process.
Similarly to storage, it is critical to optimise your product’s shipment and distribution. Disruptions in delivery can affect your business in two ways: non-delivery and late delivery. This could happen as a result of transportation failures, vehicle shortages, or other factors.
This form of supply chain risk can have a direct impact on your inventory costs and brand reputation. Hence, it is essential to put necessary measures in place to avoid it.
3. Financial Risks
Financial supply chain risk refers to the probability that a business will run into a situation that adversely affects its financial health. They can range from an unexpected or unfavourable shift in exchange rates to the insolvency of a supplier, among other things.
Exchange rate fluctuations are becoming more and more volatile and challenging to forecast. If your suppliers and customers are in different countries, fluctuations in currency rates can impact both the cost of raw materials and the cost of your finished product.
Budget overruns, price volatility, commodity risk, low profit margins, and credit risk are all examples of financial risks that need to be considered.
4. Legal Risks
Legal and contractual risks frequently arise as a result of disputes or conflicting interpretations of contractual obligations or failing to comply with the terms and conditions. Intellectual property use or misuse can also be viewed as a legal risk, particularly when patent infringement is a possibility. We can also include violations of laws and civil lawsuits in this area.
A smart strategy for avoiding legal liabilities is to educate employees and management at all levels on the law and to instil a zero-tolerance attitude toward any illegal activity.
5. Quality Risks
Inherent quality issues relating to raw materials, ingredients, production, logistics, packaging, etc., in any of the supply chain members, initiate a domino effect that spreads throughout a multi-tier supply network. While a quality failure may appear trivial (for example, packaging cardboard becoming moist and floppy), the ramifications might be severe (the packaging cannot be loaded into machinery or vehicles, and the entire assembly line halts).
Quality risk management offers a variety of approaches to provide scientific solutions in the event of such risks. Quality assurance procedures such as Six Sigma serve as a helpful guide for automating as much of the manufacturing process as possible and minimising the possibility of human error. Additionally, they promote more efficient and lean procedures.
6. Environmental Risks
Environmental risks come in many different forms and can have a wide range of impacts on supply chains.
- First, extreme weather and natural disasters jeopardise your supply chain’s ability to function normally. Earthquakes, floods, and severe hot and cold temperatures can all hamper the movement of goods through the supply chain, shutting down operations.
- Second, if workers are exposed to dangerous conditions, it can result in health problems and absence from work. Exposure to dust, gases, radiation, loud noise, and toxins such as lead, mercury, arsenic, etc., can result in various ailments and eventually result in the suspension of operations.
- Thirdly, environmental risks also include your organisation’s adverse effect on water, air, and soil due to discharges, emissions, and other types of waste dumping. It is critical to consider how daily operations affect the environment. Improper waste disposal might attract legal action and heavy fines. Moreover, consumers are growing more socially conscious and are more likely to boycott businesses that harm the environment.
While many environmental threats are inevitable and cannot be avoided altogether, control measures can always be devised. You should develop strategies to mitigate such risks and guarantee the seamless running of your business’ supply chain operations.
7. Cyber Risks
While the Internet of Things and other digital technologies enable many businesses to optimise their supply chain operations, they also expose them to cybersecurity threats such as malware, ransomware, phishing, and hacking. Cyber-attacks have turned into a significant danger in modern supply chain management.
You can use a variety of methods to mitigate cyber supply chain threats, including the following-
- Establish compliance criteria for all third-party vendors, including manufacturers, suppliers, and distributors.
- Define user roles and install security controls to limit who has access to your system.
- Prior to signing any contracts, conduct a thorough risk evaluation of the vendor.
- Establish data stewardship guidelines that clarify who owns what data and what they are permitted to do with it.
- Conduct extensive cybersecurity training for all staff.
- Secure your data backups by implementing backup controls.
8. Political Risks
Political risks include unrest or violence in society, and instability and ambiguity in government policy, including regulatory, tax, property, and human rights law. Any political upheaval involving one or more of the mentioned triggers has the potential to produce regional distress as well as global supply chain chaos. Political risk affects the ability to procure raw materials and components, process them, and bring products to market.
Organisations must be proactive in preparing for difficult global situations and cope with the disruptions caused by them.
In simple words, supply chain risk refers to any disruption in the normal course of business. These deviations can adversely affect the functioning of your business. Hence, it is critical to your business’ survival that you recognise and prepare for the various supply chain risks, such as manufacturing risks, financial risks, legal risks, environmental risks, cyber risks, and so on. In fact, failing to recognise and anticipate such dangers is a risk in itself. Building a resilient supply chain goes a long way in successfully managing supply chain risks.