Planning for Risk and Uncertainty in the Supply Chain: 5 Strategies
With the globalization of the supply chain has come a number of unexpected issues, chief among them the issue of increased risk of disruptions that can hinder the flow of both supplies and information. In fact, over the last 15 years, major world events, including September 11, the 2011 floods in Thailand, and the 2011 earthquake and tsunami in Japan, have illustrated just how delicate supply chains can be under duress and just how important smart and thorough risk management is.
Issues including but not limited to natural disasters, political upheavals, and global economic trends can lead to disruptions to the supply chain that have serious and long-term consequences:
- Lost revenue and added costs.
- Reduced speed to market.
- Problems with inventory levels.
- Problems with quality.
- Harmed business relationships.
- Damaged brands.
According to a recent report, supply chain leaders are more uncertain than ever – and 30 percent of North American manufacturers reported experiencing a disruption in the supply chain in the last three months. Having a plan for what may be inevitable problems is imperative in minimizing losses and quickly returning to optimal speed, efficiency, and quality.
Building Risk Management Plans That Work
A significant world event can affect many facets of the supply chain, including planning, sourcing, sales, customer service and transportation–and risk reduction means finding cost-efficient and practical solutions for all of these possible issues before they happen. But how can you make concrete plans about uncertain events? Here are five places to start:
- Identify key sources of risk. Risk mitigation will look very different depending on a number of factors related to the supply chain in question. For example, while creating risk management strategies, consider the regions of the world in which the supply chain operates, including supplier locations and transportation routes. Also look at potential specific weaknesses in the chain, such as sole-source suppliers or centralized inventories. New software and other technological tools now exist to help determine the sources of your risk.
- Integrate risk management into everyday decision-making. Being proactive is vital. While it is important to have specific plans in place in case of large-scale supply chain disruptions, it is equally important to consider risk and uncertainty when making all decisions as a supply chain manager. Especially when implementing new technology, working on supplier development, or increasing overall efficiency, considering the changes’ effects on risk management is key to protecting against undue losses caused by uncertainty.
- Weigh costs and benefits. In some cases, the damages caused by an unpredictable world event can be made more significant because companies have focused too long and too hard on cost-saving measures and efficiencies. Unfortunately, the same strategies that can make a supply chain function more efficiently and with less cost, such as sole-source suppliers, may sometimes be the strategies that also lead to longer, larger, and more serious disruptions. For the best results, balance your need for protection against uncertainty with your wish for greater efficiency.
- Design chains that isolate risk. Segmenting the supply chain is a proven way to reduce the impact of an unpredictable event and disruption. Specifically, you can separate different products that come with different types of risk or evolve their supply chains as need in order to minimize the chance of disruption. Regionalizing supply chains is another way to isolate risk: in the event of a natural disaster, for example, the impact is contained.
- Run Tests. With all of your strategies in place, compile a list of what-ifs that you can walk your team through in a simulated supply chain disruption situation. For example, exactly what will happen, down to the last detail, if you cannot access a certain part for an extended amount of time, or if a vital transportation route is cut off? These tests are vital dry runs of events that are very possible in the future and can give you priceless insights into how much risk management work you need to concentrate on.
While planning for uncertainties seems like a complex and costly endeavor, it is important to note that some of the above strategies, such as segmenting the supply chain, can actually improve efficiency and improve margins. In addition, remember that having solid contingency plans in place in the event of an emergency can lead to tremendous business opportunities if you are more prepared than the competition and can retain your speed to market, inventory levels, brand authority and product quality while others struggle.
ContractRoom is a cloud-based negotiation and contract lifecycle management software system that helps manage the contracting needs of your supply chain. To find out more about how ContractRoom can assist your supply chain contracting process or book a free demo please go to www.contractroom.com .