12 Jan 5 ways you can mitigate supply chain risk
Supply chain risk is an inevitable part of running a business. From sourcing raw materials to distribution of finished products and services, it affects all parts of a company’s operations. How you successfully mitigate supply chain risk and avoid the potential costs of supply chain disruption is fundamental to sustainable growth and prosperity. It requires a collaborative and proactive approach that incorporates all stakeholders throughout the supply chain. Here we discuss five ways you can help to reduce your exposure to supply chain risk.
The current risk climate
The Chartered Institute of Procurement & Supply Risk Index, is close to its all-time high, amidst a climate of political instability and uncertainty. The trading environment post-Brexit in particular, which according to Malory Davies, Editor at Logistics Manager, is “the thing that is going to define the shape of supply chains in the future”, is still unknown.
Businesses are also operating in an environment where there is increased risk of cyber attack. Government statistics reveal that nearly half of all UK businesses suffered a cyber attack or breach between 2016 and 2017. The average cost to large businesses was £20,000.
Within this challenging environment, it’s more important than ever to ensure your supply chain risk is managed well.
The Benefits of Mitigating Supply Chain Risk
Minimising your exposure to supply chain risk will help your business to be more resilient and responsive. It will also give you a significant advantage over your competitors. Internal risks are generally easier to mitigate, as they lie more within your locus of control. However, you can still proactively prepare your business and manage your supply chain to make it as robust as possible. This will help to minimise the occurrence or impact of any disruption.
Identifying supply chain risks
Supply chain disruption can occur in a number of ways. They include:
- Unpredictable or misunderstood customer demand
- Interruptions to flow of raw materials
- Economic, social and governmental factors, e.g. elections, terrorism and exchange rates
- Supplier facility conditions and compliance issues
- The stability and management of supplier businesses
- Lack of contingency planning
- Disruptions in internal manufacturing operations
- Changes in key personnel, structures or processes, e.g. supplier communication channels
- Ineffective management
- Cybersecurity breaches
How to Mitigate Supply Chain Risk
1. Undertake a business impact analysis
For your business to be able to withstand any potential supply chain disruptions, it has to be prepared. To be prepared, you need to understand and predict what effect any disruptions will have on your business and plan accordingly.
In order to understand your exposure to supply chain risk, you will need to undertake a methodical review of your business, its processes, people, suppliers, customers and market environment.
To this end, you should conduct a thorough business impact analysis of your supply chain risk. This will help you understand your potential exposure to risk, and to address the impacts of any disruptions. Identify your key business processes, and the resources and activities you need to run your business. Then assess how these key elements will be affected by supply chain disruptions.
By identifying which business activities will be most affected by supply chain disruptions, you can quantify and prioritise your supply chain risks. This allows you to focus your efforts on those that would impact your bottom line the most. You can, therefore, build a culture of proactive agility rather than reactivity, enabling you to respond swiftly and effectively to manage the impact of any disruptions.
2. Assess and monitor new and existing suppliers
Assessing new suppliers and closely monitoring those already forming a key part of your supply chain is fundamental to both understanding your exposure to supply chain risk, and proactively mitigating that risk.
When partnering with new suppliers, be sure to assess them against the following factors:
- Capabilities measured against your needs
- Opinions/experience of their other customers
- Resources, including staff, equipment, storage, and materials
- Commitment to quality standards – e.g. ISO9001
- Management and control over policies, processes, procedures and supply chain
- Financial health – do they have a healthy cash flow?
- Cybersecurity processes and policies – particularly with regard to GDPR regulations if applicable
- Approach to communication and collaboration
Being thorough with your assessment of new suppliers will not only help to reduce your supply chain risk. It will also place you in the best position to work with your suppliers to improve service levels.
To further mitigate supply chain risk, be sure to weave security elements into all your supplier agreements. Proactive elements such as an incident response plan and data security policy can help to both preclude and minimise the effects of supply chain disruption.
You should also keep a close eye on your existing key suppliers, and regularly review their standing in relation to supply chain risk. Understand their risk factors – financial standing, regulatory compliance, risk management strategies, and the political stability and technological security of their countries.
3. Reduce concentration of supply
“Supply chain risk...remains close to its all-time high and businesses must prepare accordingly. In a period of prolonged supply chain risk, it’s crucial that businesses have a network of alternative suppliers when disruption inevitably hits.” – CIPS economist John Glen.
To help mitigate the risk of supply chain disruption, try to reduce your dependence on single supply lines. Obviously, if you’re dealing with a niche product, or have secured a significant bulk discount, then you have to weigh the benefits with the risks. However, relying too much upon a constant and uninterrupted supply from a single vendor, country or region can create a single point of failure.
Try to identify and build relationships with alternative primary and secondary suppliers. Understand which suppliers would represent the best alternative sources should a problem with your preferred suppliers occur.
Choose suppliers from different geographic regions. Seek out those who supply through secondary port locations. Although cost may be the main driver for supplier location, ensuring you have a diverse base of suppliers will help when a particular country or region experiences a disruption.
4. Work with your suppliers
Be sure to collaborate and communicate with your suppliers. Develop a collaboration platform and communications framework to assist with the exchange of information. This will not only mitigate supply chain risk but will also help to cut costs, reduce errors and facilitate collaboration on matters such as logistics and security.
Make sure all of your suppliers are aware of your forecasts and customer demand cycles. When a fluctuation occurs they will be prepared and able to deal with it more easily. Be proactive instead of reactive. Incorporate agility into your cash flow management. With working capital available to smooth out demand, you’re less likely to experience disruptions in supply during spikes of increased demand. Pay your suppliers promptly. A supply chain with a healthy flow of working capital is far less likely to run into internal problems.
Make a flexible working capital finance facility such as Pay4 a part of your long-term cash flow strategy. This will allow you to smooth out your seasonal demand fluctuations, optimise your stock inventory and pay your suppliers promptly. Using appropriate working capital finance to improve the flow of cash throughout all stages of your supply chain ensures it is in the best possible position to be robust, secure and present a minimal risk to your business.
5. Proactively address supply chain cyber threats
With the continuing growth of big data and the sharing of information, supply chains are becoming just as much about the flow of information as they are about the flow of goods and services.
“Your supply chain is only as strong as its weakest link” - Deloitte
Information and security is often shared throughout a supply chain. This means that the cybersecurity of anyone business within the chain is potentially only as strong as that of the weakest member. Cyber attackers identify the organisation with the weakest cybersecurity within the supply chain and use the vulnerabilities in their systems to gain access to other members. For example, a software supplier could be breached via malware that modifies source code that is then distributed to enterprises that use the software.
In order for your supply chain to be secure, all parties throughout must carry out effective, coordinated security measures.
“Companies must ensure that any supply chain vendors have security policies and procedures that are codified, validated and certified.”- Daniel Cohn, Cohn Consulting Corp
Firstly, you must address your own cybersecurity procedures and policies. This involves educating and checking your people, improving processes, and upgrading technology if necessary.
Secondly, you need to place cybersecurity at the heart of your supply chain management. Review contracts, and ensure that all your suppliers have codified policies and robust internal IT security procedures in place.
Establish a multi-party supply chain risk assessment process that engages as many members of the supply chain as possible. Maintaining common standards and improving your supplier relationships will help you to more easily anticipate, identify, communicate, and ultimately mitigate the cybersecurity risk arising from related dependencies and vulnerabilities.
“If both the supplier and supplied have a baseline level of security they are more resilient to the threat.”- CERT-UK - Cyber Security Risks in the Supply Chain
Thirdly, you need to make sure your business is both knowledgeable and involved in your supplier’s disaster recovery plan. When it comes to cybersecurity, you and your suppliers need to have a response plan put in place before a breach occurs.
Failure to predict and reduce the risk of supply chain failure can affect your product availability, revenue generation and even cause complete production halts. Identifying potential areas of supply chain risk and taking positive steps to reduce your exposure will help your business to service its customers and fulfil its potential.