What to Include in a Supply Chain Risk Evaluation?
As with everything in life, supply chains contain inherent risks. But when it comes to something as complicated as a supply chain with all of its moving parts and business dealings with various intertwined industries, risks can result in devastating consequences if they are not effectively identified and managed. For this reason, it is absolutely critical that you create and frequently reference an effective supply chain risk evaluation that covers all of the potential issues that may arise.
Supply Chain Risk Evaluation Considerations
Having a comprehensive risk evaluation checklist is essential for successfully managing supply chain issues. After all, if you are aware of the potential problems before they arise, you’ll be much better prepared when the time comes to triage the situation.
Risks to supply chains can be effectively separated into two distinct categories: external and internal risks. Each of the risks outlined below should be accounted for in your risk evaluation process.
External risks are those that threaten the supply chain due to no of your businesses own processes. However, just because your actions didn’t directly create the risk, this does not mean that you can’t respond and lower the chances of these risks causing catastrophic problems for the supply chain. These risks include:
Risks Associated with Supply
If for whatever reason, the materials necessary for your product are in short supply, arrive late, or are never received, your orders will be unable to be fulfilled.
Risks Associated with Demand
In unprecedented situations (such as the COVID 19 pandemic) demand can soar for certain products, which can, in turn, leave supply chains scrambling to keep up with orders. Demand risks can also arise when businesses incorrectly anticipate future trends and consumer habits.
Risks Associated with Nature
The environment can play a critical role in risks to the supply chain. Natural disasters that significantly affect resources or transportation methods are impossible to prevent but can be planned for and managed as they occur.
Risks Associated with Other Companies
Many times, smaller companies within a supply chain are absorbed by larger companies. Additionally, companies can undergo internal management struggles which significantly alter their business practices. These changes can create unforeseen consequences for your business due to the interrelated nature of the supply chain.
Much the opposite of external risks, internal risks occur within your sphere of influence and can often be mitigated with careful planning:
Risks Associated with Personnel
If you haven’t thoroughly vetted your workers and managers to ensure that they are fit for their jobs, you run a high risk of failure. Your business is only as good as the employees who carry out the necessary operations.
Risks Associated with Poor Foresight
You can’t be expected to predict everything that may affect your business. But this does not mean that you should just throw your hands up and hope for the best. You should always be looking to the future and trying to get ahead of problems before they become a bigger issue.
Risks Associated with Lack of Organization
Organization within a company is of the utmost importance. Everything pertaining to company operations should be clearly organized and defined. If you find that errors and issues frequently occur within your business due to a lack of organization, it’s important that you recognize the level of risk to which you are exposing your business and the supply chain as a whole.
For example, depending on whether your company uses a JIC or a JIT model of inventory management, you may be setting yourself up for potential risk that can be overcome simply by changing this part of your organizational strategy.
How to Manage Supply Chain Risks
Recognize that each of the above factors, and many others, can pose a risk to the supply chain. This is the first step in creating a supply chain risk evaluation plan for managing said risks. From there, frequently analyzing your supply chain risk evaluation checklist for which factors may affect your business is an essential process to regularly implement for the success of the supply chain. In this way, you can future-proof your supply chain against any changes that may come about.
This can be done in a number of ways, but there is a fairly easy way to go about it. The most effective way is to create a system in which you quantify how likely the occurrence of potential risks. Furthermore, you should be able to observe whether or not they will directly affect your business.
Additionally, you’ll want to make note of how devastating each of these risk factors could be.
For example, you may make a list of all possible risk factors and rank them on a scale. In your scale, 1 could equate to “not likely at all” to 10 being “absolute certainty”.
On this list, you could also rank the potential disruption of your business. In this subsection, 1 could signify “mild disruption” with 10 denoting “catastrophic outcome”.
From there, you can then devote time and resources to preparing for the worst and most likely outcomes. This has the potential to leave you in a better position if and when these problems develop.