The Ultimate Guide to
In this guide you’ll learn about Supply Chain Risk Management, what it is, 4 types of supply chain risks, and how you can mitigate risk in your supply chain.
You don’t have to be a specialist to understand the risks and pressures that supply chain managers face. All you need to do is pick up a newspaper and see the economic, political, social, and environmental factors that impact the chain. For supply chain managers, these aren’t headlines: they are a daily obstacle to overcome.
Risk and uncertainty in the supply chain has a direct impact on your profitability and your reputation. Unless properly managed, these risks can push a company into the red and send customers into the arms of your competitors.
That’s where supply chain risk management comes in. While it is impossible to eliminate risk, it is possible to reduce the negative impact these risks will have on your business, giving you the ability to act and react quicker and smarter. Proper risk management gives you a higher level of certainty in an uncertain world.
What is Supply Chain Risk Management?
The definition of supply chain risk management is implementing strategies that manage risks everywhere along your supply chain. It is based on a continuous risk assessment so that you are less vulnerable to both everyday and extraordinary risks. This ensures continuity in your operations.
Basically, there are threats everywhere. The idea is to:
- Identify all potential threats
- Weigh importance and likelihood
- Determine most likely scenarios if these threats come to pass
- Develop strategies for managing them
Supply chain risk management is saying “if/then”: if X happens, we respond with Y.
Sounds simple. But when you get to the real world, it gets much more complex.
Why is Supply Chain Risk Management Important?
If you were to imagine a supply chain as someone on horseback carrying a package from one town to the next, you could quickly identify the risks. The horse could get injured, rain could force the rider off the road, etc. That’s pretty simple.
But add another horse. Add trains and freighters. Add ports and canals. Add dozens of governing bodies and overlapping regulations. Add a global weather system.
Here we see risks multiply, and what’s more complicated, impact each other. In a dynamic system, risks bounce off each other and complicate efforts to understand their impact.
An example of this can be found in Panama. The canal was expanded and re-dredged to fit Neopanamax freighters, though this collided with drinking water rights stemming from a local aquifer. A court decision about water allocation could lower levels in the canal ever so slightly, which could lead to a potential Ever Given situation. It’s not likely, but the globalization of supply chains leads to a lengthened chain of potential risks.
Key Principles of Managing Supply Chain Risk
There are three key concepts in managing risk in your supply chain that need to be utilized to be successful.
What are your potential risks? We’ll take a look below at the four main categories, but not every risk in the world applies to you. Understanding where all potential risks come from is key to creating your plan.
How potentially disruptive are these risks and how likely are they to happen? A broken train signal is a minor problem that’s pretty common; a typhoon that destroys a key port is remote, but would be a major one. Just as it is harmful to ignore potential problems, putting them in perspective can help you allocate resources toward their mitigation.
Simply, what’s the best way to handle these risks to minimize disruption and maintain continuity of action? This is where you have a detailed plan for any possible occurrence. If there’s a problem at a port, how do you keep your ocean freight in ship shape? What do you do in case of a strike? Having these answers allows you to react swiftly and decisively.
Of course, to know how to prepare, you’ll need to understand the four types of risks in the supply chain.
What Are the 4 Types of Risks in the Supply Chain?
The four main supply chain risks are economic, environmental, political, and ethical. These can overlap and impact each other, but can also be taken distinctly.
Economic Supply Chain Risks
The aftershock of the pandemic created long-tail supply chain disruption above and beyond what was predicted. While essential workers kept the supply chain running at the beginning, the economic shock of much-needed stimulus ramped up demand. That led to a glut in the shipping industry, which, combined with the Great Resignation that impacted the logistics industry, led to massive supply chain problems.
While those circumstances were unusual, any major shock to the economic or financial system can disrupt your business, even if you are not directly financially impacted. If businesses are closing in your chain, suppliers aren’t able to deliver, or workers are striking, that can lead to delays and the need to adjust your schedule and customer expectations.
Environmental Supply Chain Risks
In an era of increasing climate disruption, supply chain vulnerabilities are becoming more apparent. Record storms, heatwaves, massive fires, floods, and more are becoming more common. Like earthquakes, they are still unpredictable.
In the global supply chain, you have to plan for everything from typhoons destroying ports to polar vortexes freezing up intermodals to tornados driving trucks off the road. These unpredictable threats are among the most damaging and disruptive, which is why you need to have contingency plans when part of your supply chain is rendered inoperable for the short, medium, or even permanent term.
Political Supply Chain Risks
There are a few different types of political supply chain risks, from the overt and obvious to the small and easy-to-overlook. Some of these include:
- Changes in regulations or rules that impact logistics
- Sanctions or bans on different countries or companies
- Sanctions or bans on products or means of production
- Political turmoil or violence that impacts the country in which you are working
- Global political turmoil or violence that impacts everyone
“Other” here isn’t a cop-out; the idea of what is a political supply chain risk can be hard to predict. A year ago, no one would have thought that a handful of truckers protesting vaccine mandates in Canada would be a story, but those trucker protests impacted the supply chain.
Politics is fluid, and can be affected by government, environmental, and financial circumstances. That makes political risks the most unpredictable of all.
Related: see How the Ukraine-Russia Crisis Might Impact Supply Chains
Ethical Supply Chain Risks
Everyone knows the horror story of dealing with a company that seems ethical and upfront on its face, but turns out to be extremely unethical when you look into them. Or, they might seem ok one year, but changing moral awareness and cultural mores make the way they do business detrimental to your image.
We all want to do the right thing. That carries with it certain risks, though — changing companies or not working with certain parties is disruptive. That’s why your risk management plan has to include the cost of acting ethically.
Risk Mitigation Strategies in Supply Chain Management
Once you are aware of your issues, it’s time to put your supply chain risk management policy into practice. That starts with a broad vision.
Define Your Supply Chain Risk Management Policy
Your policy needs to answer a lot of questions. These are broad, and they need to be implemented for the scenarios you identified and assessed. Some of these questions include:
- How do you gather, monitor, and assess information about threats?
- What open-source information do we employ?
- What technology do we use to monitor situations and understand our potential liabilities?
- How do we assess what is reliable and actionable and what is not?
- What are our backup plans for every spot of risk and uncertainty in our supply chain?
- How do we put these plans into practice?
- How do we communicate our plans across our teams?
- How do we communicate progress to customers? What level of data-sharing is relevant or applicable?
Having answers to these questions is the beginning of risk management.
Train Teams to Adhere to Your Process
It’s a cliche to say that a chain is only as strong as its weakest link, but it is also true. Your teams work with contractors around the globe. They have their hands in the day-to-day and the minutia. But they also need to be apprised of what their role is during emergencies, so that they can be part of the plan.
In a way, risk management mirrors the supply chain. Every link has to understand its role, from carrier management to customer service to PR. Provide risk management training and make it a part of your process and ongoing operations. If your people have insight into what to do when the unthinkable happens, it won’t be quite as unthinkable.
Gain Real-Time Visibility Into Your Supply Chain
It’s stunning to think about old whaling missions: they were gone for years, and if something went wrong (like say an attack by Moby Dick), no one would know about it until a survivor washed up, or years went by without contact. Supply chain visibility was almost nil.
That can’t happen in today’s world. You need end-to-end supply chain visibility. This kind of insight lets you plan shipments, handle logistics, and impart insight to your customers. But it also helps you identify when something is going wrong, and give you a chance to make it right.
Real-time visibility is your canary in the coal mine: when you see trucks start to stack up, you know there is something wrong with the bridge. When ships are being diverted, you know there are port issues. And that means you can act right away, instead of waiting.
Your entire supply chain risk management policy hinges on being able to react in real time. Real-time visibility is what makes that possible.
Stay Up to Date With Current Trends
There is a lot to keep up with when managing the supply chain. From weather events to the rumblings of political turmoil to rule changes in ponderous supranational bodies with endless acronyms, you need to understand the flutters that can cause a hurricane.
Knowing supply chain trends and insights, as well as technological and political trends that impact your management, lets you modify and adjust your policies so that they are never outdated.
Supply Chain Risk Management Examples from FourKites Clients
Policies are great, but the question is: how do they work in the real world? How does visibility help protect your company against the vagaries of global events? This supply chain risk management case study is an example of how companies like yours got ahead of risk management.
Unilever and Solving Pandemic Congestion
We began our work with Unilever South Africa in late 2019. One of their largest challenges was lengthy delays at their six international borders. While delays can be as much as four hours in a normal day, the early days of the pandemic saw them rise to 10 hours, or even more.
Unilever used our Custom Geofence capability to create custom zones around border crossings and ports of entry. They were able to automatically issue alerts to team members throughout the chain whenever a shipment entered, exited or had been delayed at the border.
This allowed Unilever’s team to make targeted decisions. Instead of trying to put out every fire, they were able to focus on the longest delays and route around major border issues.
Learn more: Read the Full Case Study
See the Risks. See Your Way Past Them
Supply chain risk management depends on visibility. If you can identify the risks, you can assess them. If you can assess them you can plan for them. And if you see risks happening in real time, you can put your plans into action.
Get Started with Supply Chain Visibility from FourKites
The road to stronger supply chain management starts with FourKites’ global supply chain visibility software. Contact our team to learn more.