The growing importance of supply chain risk management

05 April 2023 5 min. read

Against the backdrop of a highly disruptive and volatile market environment, supply chain risk management has risen to the top echelons ofboardroom agendas. Vivianne Courte-Rathwell, a Consultant at Sourcing Champions, explains why the concept is gaining importance – and outlines some of its main benefits.

A review of the historic supply chain disruptions of the past few years would hardly be news to anyone. In an unprecedented ‘risky’ period, with a pandemic, climate change, a Russia-Ukraine war, geopolitical pressures, and much more, it is no surprise that global supply chains have recently been dealing with heightened risks.

However, it is key to keep in mind that such disruptions do not only occur in unfortunate periods of history. Risks are by nature ubiquitous and unpredictable, and that means that leaders need to embrace an approach that helps them mitigate, adapt and learn.

Supply Chain Risk Management is a multi-layer practice, supporting entire enterprises by focusing on the external supply base

Let’s walk through a number of examples:

In 2012, there was a disastrous tsunami in Japan which impacted the automotive industry worldwide. In 2015, an immense explosion at one of the largest ports in the world, the Port of Tianjin, caused significant costs and losses. In 2018 the US – China trade war negatively impacted profit margins and created tense times of uncertainty.

It is impossible to conceive to avoid all risks. Instead, the key is to mitigate significant damages through foresight in strategic management.

After the tsunami of 2012, automotive organizations had nowhere to turn as many realized that their single source of materials was Japan. Even OEMs with a multi-sourcing strategy encountered issues because many tier-1 suppliers procured materials from the same tier-2 supplier. As a result, the challenges of tier-2 suppliers became a direct concern as well.

Had there at the time been a multi-layer supply chain risk management (SCRM) program in place, these issues could have been (easily?) avoided and impact to the business would have been minimized. SCRM tools and processes act as guardrails and shields protecting thebusiness from potential perils, hence providing a competitive advantage.

The data challenge

Next to disruption in supply chains, there is the pressure from governments, consumers, and other stakeholders to disclose data about supplychains. Many governments have enforced or are in the process of drafting a law that requires companies to monitor their compliancy (for example: in human right or/and environmental risks) throughout their supply chains.

Recent and upcoming Supply Chain Acts

In the countries where these supply chain acts have been enforced, there is a great deal of uncertainty as companies do not yet have thecapabilities to fulfil the requirements of the new laws. This can for instance be seen in Germany where the supply chain act introduced on 1 January 2023, has left companies on the backfoot – a significant share of companies is still not prepared.

Supply chain risk management can be a valuable method to stay on top of regulatory requirements and changes in the marketplace that need to anticipated.

Supply chain risk management

With supply chain risk management in place, organizations can identify and recognize their critical supply chains risks. This includes analyzing the critical dependencies and failure points within the supply chain.

Gaining this insight is however easier said than done. Due to globalization, supply chains have become very complex (cross-border, layered, etc), and as a result, many companies have no visibility or control over their supply chains.

This is where technology enters the equation – with the potential to serve as a major differentiator. Companies can get fast insights in supplychains risk by integrating digital solutions that visualize and monitor potential supply chain risks for operations worldwide. A digital solution will facilitate the continuous monitoring of supply chain risk.

By feeding these insights into their supply chain risk management approach, companies can identify, prioritize, mitigate and act upon risks – with speed, while continuously closing the feedback loop in light of continuous improvement.

During this process, supply chain leaders will have to manage a delicate balancing act: what risks need to be mitigated (such efforts come at a price) and what risks need to be accepted and resolved down the line. Making such calculated holistic decisions based on likelihood analysis is a complex equation, yet if done well, it pays off.

Other benefits of supply chain risk management include: the ability to outperforming competition who operate in a similar risk environment; driving down costs through mitigation and more focused and target interventions; protecting the company’s reputation by complying with supply chain acts; and reducing the overall degree of decision-making uncertainty.

Risk exposure levels from Start to Strategy

Building resilience

Building on an extensive track record in supply chain management and digital, Sourcing Champions specializes in helping organizations implement supply chain risk management. In our approach, we kickstart the process with a maturity assessment, shedding light on thecurrent maturity of SCRM and improvement potential including benefits.

Based on our practical experiences, we advise companies to align their supply chain risk management approach with the broader enterprise risk strategy, and tailor their ambition level incorporating among others feasibility, the nature of the business, and risk profile. There are different levels of risk exposure (from ad-hoc to strategic), and a variety of different levers can be used to build maturity.