Management of Supply Chain Risks
Companies face risks on a daily basis such as; shortage of raw materials, failures of production plants due to natural disasters, labour strikes, currency fluctuations, technological problems, laws and regulations, terrorism, political unrest and non-compliance with social and environmental standards along the supply chain. This calls for the need to have an on-going monitoring and management of the different risks.
Supply chain risks can threaten the existence and continuity of a company. Organizations therefore need to develop risk management programs for their supply chain. Because there are different types of risks, all departments and stakeholders should be included when developing the risk strategy. This can only be made possible by the support and contribution of senior management.
An organization should allocate some time, budget and resources for preparing a risk management strategy and analysis.
Organisations should consider the following when developing their supply chain risk management framework:
- Once an organisation recognises that it is exposed to risks in its supply chain that may cause any disruptions and realises the potential serious consequences of such disruptions, it creates an awareness of the supply chain risks to the entire organisation.
- The risk strategy should be aimed at reducing the likelihood of supply chain related risks from occurring which can impact the organisation’s operations and in minimising their occurrence.
- Business continuity arrangements should be developed to allow an organisation to continue to supply products and services following a disruptive incident in order to minimise a negative impact to customers and the organisation.
- Appropriate systems and processes should be developed to handle the management of all aspects of supply chain risks.
The four key processes necessary for the effective management of supply chain risks include:
1. Risk identification – this involves understanding where the risks are, both internally and externally. Internal risks include any risks occurring from within the organization. External risks include any risks originating from outside the organization. Risks can be identified by;
i. Brainstorming with internal and external stakeholders.
ii. Researching the environment; economic, political, legislative and social.
iii. Conducting interviews with individuals and/or organizations
iv. Undertaking surveys of staff or clients to identify current and anticipated issues or problems
v. Reviewing the risk plan or preparing system analysis techniques.
2. Risk assessment – this involves analysing the risks and determining how critical they are to the ongoing operations of the organisation. Risks can be assessed by;
i) Identifying existing risk strategies and controls that aim to minimize the risk.
ii) Determining the likelihood and consequences of a risk or opportunity whether positive or negative.
iii) Estimating the level of risk.
iv) Considering and identifying any likely uncertainties that may arise.
3. Risk evaluation- this involves comparing the level of risk found during the analysis process against the established risk criteria, and deciding whether the identified risks require further action and treatment.
4. Risk treatment– this involves working through options to deal with unacceptable risks in the organization, in order to either reduce or eliminate negative consequences, or to reduce the likelihood of an occurrence. It also aims to enhance positive outcomes for the organization. Risk treatment takes the following into consideration;
i. Method of treatment.
ii. Those tasked to conduct the treatment.
iii. Costs involved in the treatment.
iv. Benefits of treatment.
v. Likelihood of success upon treatment.
vi. Ways to measure the success of treatment.
5. Risk monitoring – this involves monitoring risks and reviewing the effectiveness of the treatment plans, risk strategies and the risk management systems that have been set up to effectively manage risk. This needs to be done periodically in order to capture new risks and manage them effectively.
Risk Strategy
An organisation needs a strategy to control all risks affecting its operations. These strategies include;
1. Avoid – the organization can decide not to undertake an activity that is likely to generate risk. Alternatively, the organisation can opt to perform the activity in a different way that will not involve the same risks, either by changing processes, equipment or resources. Otherwise, if the activity is essential the risk must be accepted and managed.
2. Minimise – the organisation can reduce the likelihood of the risk happening e.g. quality control, staff training; or reduce the impact if the risk occurs e.g. emergency procedures, public relations.
3. Spread – the organization can shift some or all of the responsibility for the risk to another party e.g. insurance, outsourcing, partnerships. Risk can also be transferred by cross-training staff, identifying alternative suppliers, performing manual tasks.
4. Accept – the organisation will accept the risk if it can’t be avoided, reduced or transferred. The risk may have a low impact or probability and alternative strategies are not likely to be effective or efficient. Other risks may be extremely unlikely and therefore too impractical or expensive to treat.