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SUPPLY CHAIN: Risk Management for Resilient Supply Chains

Updated on August 29, 2014

Supply Chain Risks

A burning factory
A burning factory | Source

The size of the global supply chain has grown over the years as many businesses have become interdependent.

This interdependence means there is a need for reliability in delivery of products and services. Without this, a company cannot meet its customer demands.

Companies must manage their supply chains in a way that helps them meet their customer needs. Any risk to the supply chain must be effectively mitigated against.

Many things can go wrong

  • Fires
  • Theft
  • Competitors
  • Government regulations

Supply Chains

All players in the value chain have their own processes and practices that they use to ensure delivery of their core product.

These players do not understand the vulnerabilities they face and the effects these may have on them. It is only after a major disruption that the security of the whole system becomes an important factor.

Resilience of supply chains after disruptions depends on how well they are able to analyse the risks before they occur.

In the last few years, major natural and man-made catastrophes have had a negative impact on supply chains.

This has exposed the weaknesses of the much touted supply chain strategies such as outsourcing.

Other strategies such as off-shoring and just-in-time inventory management have not mitigated against disasters. Some supply chain practitioners have even blamed these strategies as the cause for failure to recover from disasters.

Supply Chain Risks

Supply chain risk management involves strategies to minimise the negative effects on supply chains.

These negative effects affect many stakeholders within the value chain. The inter-connected and complex nature of these supply chains requires effective risk management strategies.

There are many risk management opportunities within supply chains :

Inventory management

Inventory management involves purchasing, storing and processing of materials needed to meet customer expectations.

Supply chain strategies aim at minimising the risk of disruption due to lack of raw materials. These strategies usually involve stocking up with large inventory buffers.

Such approaches to minimising risk of disruption are expensive and unreliable. This is because the usually result in increased handling and operational expenses.

Supplier management

Companies use different supplier management strategies to manage the risks inherent in supply chains. These include pushing suppliers for price reductions, having many suppliers and tight delivery schedules.

While these strategies appear to work for some time, they are sustainable in the long run. Relationships with suppliers become strained and toxic. Suppliers will then lack the motivation to work for the greater good of the entire enterprise. This is because they feel the treatment they are getting is unfair to them.

They will then resort to cutting corners in the hope of getting better profits. A reduction in the quality of products is the inevitable result of such actions. To make matters worse, when a real crisis in the supply chain occurs the suppliers will not go out of their way to help.

Insurance

Having some form of insurance helps a business to get back on its feet after a disruptive event.
Payments received after a fire can help a company rebuild its physical assets.

Insurance is important in helping companies bounce back after disruptions. But it cannot compensate for some types of losses such as death of an employee.

It is not easy to recover any business lost after a disruptive event through insurance compensation.

Contingency Planning

Supply chain risk management programs help in identifying potential risks. These programs should contain concrete plans detailing the measures to take when disruptions occurs.

By doing this, businesses will have the ability to bounce back from disruptive events in the shortest time and least cost.

Contingency planning looks at the possible disruptions that can take place. Each possible risk will have a corresponding set of measures to mitigate against it.

Contingency involves preparation for predictable and unexpected event and has the following stages:

  1. Recognition of the current situation
  2. Identification of possible risks
  3. Scenarios evaluation
  4. Impact assessment
  5. Strategy for managing risk
  6. Plan Preparation and Management responsibilities
  7. Crisis Simulation

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    • gitachud profile image
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      David Gitachu 3 years ago from Nairobi, Kenya

      Thanks Jimjih for the positive comment

    • Jimjih profile image

      Jim Holbrook 3 years ago from Richmond, Virginia

      Very informative article.