Every enterprise -- be it private, public or nonprofit -- is exposed to risk in its supply chain. The list of risks is long and includes lacking the goods or services necessary to meet customers' needs, not being able to take advantage of market opportunities, disruption in internal operations, interruption in the flow of products and penalties for noncompliance with environmental and labor laws.
Successfully managing these risks is critical to the growth -- and possibly the very existence -- of an organization. Companies can employ a number of supply chain risk mitigation strategies to ensure a high-performing supply chain, according to experts.
Supply chain plans need to be as accurate as possible and flexible enough to alleviate or rectify any problems, according to Nucleus Research analyst Seth Lippincott. "You should know about a problem sooner and then be able to rectify it with the tools that the solution gives you instead of having to go outside the tool," he advised. Supply chain risk management software, for example, lets organizations identify problems and take the appropriate steps to remedy them.
Managing risk in the supply chain has become incredibly important for companies since even the slightest error can cause huge ramifications to their brands, said Justin Bateh, supply chain expert and professor of business at Florida State College at Jacksonville.
"Because a company can't really control the internal operations of its suppliers, managing risk becomes ever more important," he explained. "Not only would they be concerned with errors, but also with suppliers going out of business or raising prices when a specific raw material is critical to production." Therefore, it's advantageous for companies to manage this risk by having dual supplier relationships instead of depending on a single source.
Focus on relationships with suppliers
Seth Lippincottanalyst, Nucleus Research
Having transparent relationships and communication with your suppliers can help foresee any potential supply chain risks down the road, Bateh said. "It's also important when dealing with errors or recalls or warranties to have some mode of traceability, so that when something negative does occur, you can identify the flawed raw source, the supplier of the source, and fix that quickly," he added.
Enterprise risk management (ERM) systems help keep the transparency and tracking ability in clear view, according to Bateh. "Also, your risk management team should partake in scenario planning to identify all of the possible risks and the predicted solutions," he said.
The issues of supply chain risk management and supplier risk management are subsets of a larger category, supplier relationship management, because you can't manage risk if you can't manage the relationship, said Mark Trowbridge, principal at consultancy Strategic Procurement Solutions. "A high proportion of the supply chain is being done by external suppliers, outside of company walls," he said. "And the risk has increased because you have a third party doing it for you."
Performance metrics, financial ratings provide early warning
There are a number of supply chain risk mitigation strategies companies can use to address those third-party risks, including shifting the risk to suppliers, Trowbridge said. "You can do that by structuring your deals in a certain way to protect yourself against risk," he suggested. "You could have insurance that protects you against certain types of events happening with your suppliers. You can also have contracts that have the suppliers protecting you and agreeing to hold you harmless for things that happen. And they can also indemnify you and step into your shoes and take the consequences of their actions."
Companies should also provide their suppliers with automated scorecards that offer feedback on how they're performing. Any supplier that doesn't receive regular feedback, say, once every three or six months, will probably assume that it's performing just fine -- even if it's not -- according to Trowbridge.
Another level of risk management, he said, is checking for the financial stability of all the suppliers, which can be done with predictive financial stability reporting provided by a major credit rating agency on thousands of potential suppliers. That data, he noted, is available in a cloud-based tool that warns procurement leaders of potential supply chain failures, providing ERM visibility to a firm's management team.
Checking a supplier's financial viability is one of the more critical supply chain risk mitigation strategies, added R "Ray" Wang, analyst at Constellation Research. "You can't pry into their [bank accounts], but you can get a better sense of how suppliers are doing based on external data by seeing what contracts they've won [and] by looking at their labor rates," he said. "Companies should also worry about cybersecurity in the supply chain. So companies have run audits to see how strong their [suppliers'] systems are."
Cathy Hackllead futurist, You Are Here Labs
Supply chain risk mitigation strategies are now being bolstered by newly emerging technologies. For example, package delivery companies, such as UPS, could implement driver training programs based on virtual reality to prepare drivers on ways to avoid risk, said Cathy Hackl, lead futurist at You Are Here Labs.
"I was able to work with UPS as their virtual reality expert prior to them launching their VR driver-training program to help drivers be safer out there," she said. "Before you put someone in one of those trucks, if they can practice 100 or 50 times before they get on the road, that will hopefully reduce human error and keep the streets safer."
Yet another option to consider for supply chain risk mitigation strategies has companies applying gamification to such mundane tasks as sorting products in the warehouse. "With augmented reality, through the use of augmented reality glasses, for instance, workers will be able to sort things in a very gamified way," Hackl said. "A lot of the younger people coming into the workforce are gamers, and this will make sorting more appealing to them [and reduce the chance of error]."