Today, supply chain risk is recognised as a major threat to business continuity. A break in the supply chain can reduce a company’s revenue, cut into market share, inflate costs, or threaten production and distribution.
FM Global has identified three steps that organisations can take to reduce their supply chain risk:
1. Identifying suppliers
Identifying critical suppliers is the first step towards understanding your exposure to supply chain risk. Your company may have only a few suppliers or - like some companies - perhaps hundreds or even thousands. Your organisation may also be the supplier in another company’s supply chain. How will a disruption along that chain impact the profitability of your business? Each supplier has a unique connection to your operations and to each other. No two may be alike. You may have a good understanding of the suppliers in tier one and be aware of your vulnerabilities to disruption. But what do you know about the next tier and beyond? There may be a weak link that can spell disaster to your bottom line.
2. Identify the risks shared by your company and your suppliers
Risk factors affecting your suppliers may ultimately affect you. Once you’ve identified your key suppliers, the next step is to conduct an accurate risk assessment. The following risks apply to virtually any company.
3. Loss prevention
- Environment. These risks are typically related to economic, social, governmental and climate factors. There has been no shortage of these issues recently, as witnessed by terrorist attacks, tsunamis, hurricanes and earthquakes.
- Market influence. Is your supplier resilient under adverse conditions? If not, disturbances to the supply of product within your supply chain could have a devastating impact on your bottom line. And what do your suppliers know about the market resilience of their suppliers? Their exposure could be your exposure.
- Business practices. The supplier’s financial and management stability, as well as its internal processes and corporate governance practices, should be understood for the risk they represent. For instance, disruptions to internal operations of a supplier can easily ripple through to your organisation if not mitigated properly.
- Physical plant. Loss prevention measures are as critical to your supplier’s facilities as they are to your own. The difference is you don’t manage your supplier’s facilities.
Once you know who your suppliers are, how do you mitigate the risk they bring? This requires a deeper understanding of the suppliers’ business operations and its ability to recover from a major disruption. It is possible a supplier will be highly resilient to a disruption, owing to a solid business continuity plan and present a smaller risk than initially thought.
There are several ways to mitigate supply chain risk, through risk improvement efforts, switching to suppliers with less exposure, or by spreading the financial impact across multiple suppliers. Cultivating alternative sourcing arrangements is typically the best way. Do you have a back up for your back up?
Increasing your inventory levels (of raw materials or finished goods); bringing more production in house; increased equity investment in the supplier, to better control supply and reduce potential threats; creating business continuity planning requirements for all suppliers; planning for substitute products and service or redesigning products to allow for greater supplier flexibility are all viable options for the risk manager looking to create a strong risk management plan.
Vulnerability is no longer an option. Organisations should view preparation for the next big disaster as a competitive advantage and ensure the same loss prevention practices are implemented across the entire supply chain.
☛ Stefano Tranquillo is vice president – operations manager, northern Europe operations at FM Global