7 Types of Supply Risks and How to Manage Them

Supply Risk January 26, 2021

Chloe Henderson

Writer

Many businesses believe that risk management is only applicable to internal operations. However, while it is more challenging to prevent external threats, companies that enhance their supply chain visibility are able to map out and anticipate potential risks.

By understanding the operations occurring upstream in the supply chain, companies can identify supply risks to avoid product activity disruptions.

What is Supply Chain Risk?

Supply chain risk refers to the threat of disruptions that could impact inventory production, distribution, and procurement. While the initial supply chain disruption can immediately hinder productivity, businesses may also experience negative financial repercussions in the long-term.

There are many events that can disturb the flow of goods, from faulty manufacturing equipment to poor supplier management. In order to prevent these kinds of threats, businesses first must identify the various supply chain risks-

Financial Risks

Financial risks can range from decreased sales to a partner's bankruptcy. These risks can occur in and outside of the supply chain as the result of-

Budget overruns

Fluctuating customer demand

Economic state

Lost investors or funding

Lagging systems

Scope of Schedule Risk

The scope of schedule risk is typically the result of flawed project and timeline management. This risk not only makes it hard to meet targets on time but also introduces unnecessary costs.

However, there are some external factors that may impact time management, such as natural disasters and compliance issues.

Legal Risks

Most legal risks are related to contractual disputes between various businesses within the supply chain network. If one company fails to meet the terms and conditions of their agreement, they are liable to pay fees or terminate the contract.

Common legal risks include-

Non-compliance

Patent infringement

Misuse of intellectual property

Law violation

Civil lawsuits

Environmental Risk

Environmental risk refers to the impact a company has on air, water, and soil from their emissions, manufacturing, and material waste. This risk is typically evaluated while sourcing manufacturers, suppliers, and contractors.

Sociopolitical Risk

Sociopolitical risk refers to a company's inability to adapt to changes prompted by government, political, or social conditions. This can be seen in businesses sourcing material from low-cost countries and not considering the cultural and environmental impact.

Project Organization Risk

Project organization, also known as planning, risks are often the result of logistical planning mistakes, such as not scheduling staff correctly or forgetting to rent equipment. This can delay operations and any sequential processes.

Human Behavior Risk

Human behavior risk is the hardest threat to identify and mitigate, as employees can be unpredictable. A project may completely stall if a vital worker calls in sick or leaves the company. This requires managers to use their better judgment in order to designate responsible, reliable workers to their team.

However, it is nearly impossible to mitigate human behavior risks outside of one's own business. Therefore, management needs to be able to differentiate between internal and external human risks to determine what is in their control-

Internal Risks include any threats that a business can control or influence, such as scheduling, payroll, and product designs.

External Risks are threats out of management's control, including government regulations, currency rates, and international contracts.

4 Steps for Managing Known Risks

There are various technologies and practices that businesses can use to manage identified risks. By creating a management procedure, companies quickly define and mitigate threats to prevent significant repercussions-

1. Identify and Report Threats

First, companies need to map out their supply chain and assess production, procurement, and sales threats. This involves evaluating-

Suppliers

Manufacturers

Warehouses

Distributors

Transportation routes

Retailers

These risks should be entered into a register so employees can monitor them in real-time. This may require further investigation into operations where data is limited.

2. Establish a Supply Chain Risk Management Process

Next, each risk previously outlined should be scored by three elements-

Potential impact on the business

Likelihood of the risk occurring

Business's ability to mitigate the risk

Based on this criterion, companies can establish tolerance thresholds that represent their risk management capabilities.

However, it is critical that all risks are judged using the same methodology, or else it can be challenging to prioritize threats accurately. Businesses should first focus on risks that pose the most significant threat and have a high probability of occurring.

3. Monitor Risks

Once all of the risks are outlined, employees can begin monitoring them. Manual monitorization can be difficult as employees are already orchestrating other tasks. By implementing machine learning software, businesses can automate their risk management throughout the supply chain.

From demand forecasting to point-of-sale (POS) systems, modern software uses machine learning technologies to define trends and identify anomalies within datasets. This significantly reduces the risk of human error, which can substantially impact data accuracy.

By implementing monitoring systems, companies can prevent threats from snowballing and causes severe consequences, saving costs necessary to resolve irreversible issues.

4. Routinely Review Processes

Even after the risk management system is established, employees should frequently review their governance mechanism to ensure it is running efficiently and improve its infrastructure.

The risks should be cross-examined with the management process to determine if the methods adequately identify and mitigate threats in a timely manner.