Risk Management in Supply Chain and Logistics
The new age supply chain is global and quite complex. And with the quantum leap in geographic terms, supply chains become more complex and the risk of disruption intensifies. While there is a known risk potential, it is of course, prudent to have a risk management plan in hand. Obstacles in a supply chain can crop up from anywhere. Hurricanes, earthquakes, tsunamis, tornadoes, and billowing ash from obscure volcanoes, Government shutdowns, power cuts, legal issues, and wars can happen anywhere. A certain consignment of pharmaceutical products worth $10 million of the company’s pharmaceutical products was stolen from a truck stop in the past. This resulted in chaos for the pharmaceutical company. It was not just monetary loss alone.
Vulnerability and Resilience
Risk management primarily deals with the study of vulnerability and resilience. Vulnerability is all about potential risks and resilience refers to the ability to recover from disruptions of any type. A company with suppliers who are geographically apart will have higher resiliency when a disruption hits a certain part of the supply chain than a company with only a single source of supply. Experts classify the various risks that can occur. And see how resilient the team is, to overcome the risk and start working normally.
Every business is a gamble. Every stakeholder considers his risk appetite when evaluating the tradeoff between risk aversion and the willingness to accept the materialization of risk. Popular approaches in risk management include ongoing evaluation of supplier financial health and expanded supplier pre-qualification standards. A lot of supply chain risks are mitigated by multiple suppliers sourcing, creating better supply chain traceability, and selecting suppliers closer to the end market.
The risk management framework:
There are eight elements in a typical risk management plan: internal environment, object setting, event identification, and risk assessment (type of risk and magnitude), risk response plan (what to do, who is responsible, how to manage the risk), control activities, information-communication, and monitoring.
Basically, a risk management plan begins with “what-if” scenarios, looking at situations such as demand increasing by 30 percent, demand decreasing by 30 percent, or lead times decreasing. Then, risk planners try to predict the effects of these changes on service, revenue, capacity, inventory etc. Most importantly, each situation is tagged with a potential probability. Probability is derived from past occurrences. Inventory management comes in to the first frame of this picture. Risk experts adopt stochastic approaches to planning global inventory targets, taking into account risk levels, historical “pinch-points,” and the element of uncertainty by calculating probabilities of occurrences. Developing global supply chain network models are of paramount importance. These chains identify three critical information flows—commercial, logistical, and financial—that provides opportunities for global profit optimization through optimal cash conversion cycle management.
The success of your supply chain demands an understanding of supply chain risk. It is always the case of success and risk being almost inseparable.