Guide to Supply Chain Risk Management
October 25, 2023
Supply chain disruptions are unavoidable and increasing — over 11,000 disruptions were reported in 2021 in the United States, a significant increase from previous years. These delays can make meeting production goals and distributing products more challenging.
By anticipating risks, businesses can respond to problems more effectively. Supply chain risks can occur from within your business or from external circumstances, leading to disruptions. Robust risk management strategies help companies mitigate negative effects.
What Are Risks in the Supply Chain?
Supply chain risks are factors that can impair the efficiency or success of businesses. Risks can cause financial or reputational damage, making it harder for companies to work toward goals.
These threats can originate from both internal and external positions:
Internal risks occur inside your business operations and are within your control. These risks include the following:
- Cybersecurity risks: If your business uses software or other technology to manage operations, you face cybersecurity threats. Keeping your organization and customer data private is vital, but malicious attackers often try to steal data through breaches. In 2022, data breaches cost an average of $9.4 million for companies in the United States, causing financial setbacks that could negatively impact businesses for years.
- Planning risks: Companies within the supply chain use forecasting to determine when to reorder materials and products. Keeping enough stock on hand lets you meet customer needs and efficiently work through ordering. However, you could encounter reordering issues if you incorrectly assess how much your company needs. These mistakes could cause high warehousing costs or wasted products.
- Mitigation risks: Supply chain disruptions are frequent, causing delays in manufacturing, distribution, and all other stages. Your business could face significant setbacks without a solid mitigation plan. If you don’t plan enough for disruptions, the delays could lead to lost profits and decreased customer satisfaction.
- Manufacturing risks: Your company workflows let you process orders and complete administrative tasks. Internal disruptions can impair your daily operations and cause production delays. For instance, a sudden employee absence could disrupt workflows if no one else has the proper training for their position.
External risks come from outside your company. They are largely out of your control, making response plans often challenging. These risks include the following:
- Business risks: Supply chain companies rely on distributors and suppliers to access and transport products. Your partnerships ensure smooth progression through the supply chain and keep production on time. If other businesses face disruptions, they could become unable to send materials on time. Your processing times could suffer as a result.
- Demand risks: While companies use forecasting to anticipate buying trends, sometimes buyer demands don’t meet predictions. Sudden surges or losses in demand can severely impact your operations. You could have too little product in stock and be unable to fulfill customer orders, or you might order a surplus of an item that consumers suddenly have no interest in.
- Environmental risks: Political, socio-economical, governmental, and environmental issues constantly affect the supply chain. International relations allow for overseas shipments, but political occurrences can disrupt those relations. Natural disasters and other environmental occurrences can limit shipping capabilities, creating production delays or unsatisfied customers.
How to Minimize Supply Chain Risks
Risk management is the process of anticipating and responding to supply chain risks. Every business faces a unique blend of risks that make it more challenging to carry out daily operations. During risk management, companies identify threats and develop plans to address them if they occur.
Supply chain risk strategies vary depending on business preferences and needs. Many approaches include the following steps:
1. Identify Your Risks
The first step in most risk management strategies is identifying your business’s risks. Think about any situation or factor that could interfere with your regular operations. You can consider past threats that disrupted your operations and whether they are still impactful. For instance, perhaps you have experienced delays from an overseas supplier before and expect these to occur again. External threats such as global economic troubles or weather events are harder to predict, but you can still note these as potential risks.
Once you have these risks in mind, you can craft mitigation plans that reduce damage if they occur. You could increase lead times when working with your overseas supplier to account for possible delays. That way, you have more time to address the disruption and still meet production times.
2. Address Environmental Challenges
While you can’t control the weather or predict worldwide events, you can prepare your business to minimize the effects. Resiliency helps your organization adapt to abrupt events and minimizes negative impacts.
For example, you could apply strategies such as the following:
- Increase supplier relationships: You can adjust supplier and distributor partnerships to ensure you can access materials. For instance, you could have multiple suppliers for raw materials and other products. That way, if one supplier fails to meet a deadline, you could turn to the alternative. Some suppliers operate out of multiple locations, which could also be helpful if one location faces delays.
- Work with local suppliers: Another strategy is to work with nearby distributors and suppliers. The proximity reduces shipping times and makes it easier to access supplies during weather-related events.
- Build product buffers: You can prepare for adverse weather seasons by increasing your stock of certain products. For example, you might increase product orders ahead of hurricane season or periods with heavy snow. This technique helps you avoid out-of-stock items, keeping customers satisfied.
3. Upgrade Your Technology
Advanced software and technology can streamline many aspects of risk management. Tools such as electronic data interchange (EDI) and vendor managed inventory (VMI) can help you forecast buying trends, reducing potential risks. They eliminate many manual processes, allowing your organization to build more efficient and secure workflows. Many of these solutions also provide advanced security features that reduce cybersecurity threats. If your current technology isn’t as effective, consider switching to an upgraded option that simplifies inventory risk management.
Minimize Supply Chain Risk with EDI and VMI
Supply chain risks are inevitable, but robust risk management techniques can minimize their damages. By assessing your business’s internal and external threats, you can develop response plans that target your specific risk factors.
Technological solutions let you enhance risk mitigation even further. You can apply both EDI and VMI to transform your supply chain approaches and anticipate upcoming problems.
Electronic data interchange streamlines data exchanges between you and your partners, providing real-time updates on supply chain movements. Gain immediate insights into inventory and orders, making instant and informed decisions. Vendor managed inventory solutions optimize your inventory approaches by forecasting buying behaviors and preventing stock-outs.
TrueCommerce offers EDI and VMI solutions that suit a wide range of business and supply chain needs. To learn more about our solutions, contact us today.
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