Supply Chains: Managing Risk
Updated: Dec 14, 2020
As highlighted in Part 1 of our Supply Chains blogs, the Covid-19 crisis has illuminated the complexities associated with global supply chains. External disrupting factors in one area, be it governance, social or environmental, can send ripples down the line, having international consequences. It is imperative that businesses understand the risks associated with global supply chains and implement effective management strategies to help reduce them.
Managing supply chain risk
The UK Climate Change Risk Report stated how many large retailers and manufacturers, including Tesco, Morrisons, The Co-Operative, Waitrose and Dyson use weather data and forecasting services to reduce the risk of severe weather-related disruption along their supply chains and provide information on future demand trends. Asda’s previous work with PWC to produce a Climate Adaption Framework is another demonstration of a large UK company taking steps to understand potential external risks and acting to minimise their effects on the supply chain.
Looking at the innovative ways in which some UK businesses are reacting to the challenges of climate change provides a good demonstration of the processes required to manage international supply chain risk. The process can be summarised in three simple steps:
1) Identify areas of risk
2) Implement change
3) Evaluate the impact of strategy
1. Identifying Areas of Risk
The first step to minimising supply chain risk is to identify areas of vulnerability. Quality mapping can allow companies to focus efforts on the areas which are the highest risk. These areas present the greatest opportunities to improve supply chain resilience.
When mapping supply chains, companies should analyse risk over a long period of time to access long-term opportunities to improve resilience. For example, Colgate-Palmolive worked with MIT researchers to extend their risk-mitigation horizon from five years to twenty. Many of their products are reliant on mint derivatives which are linked to mint crop quality and yields. Whilst short term incidents like fires can have extreme effects on sourcing, long term effects like changing weather patterns, increased flooding and droughts can have even more significant overall impacts. By extending their risk horizon, Colgate-Palmolive better understand their risk, meaning they can work with their supply chains to increase their climate resilience.
2. Implement Change
Once the vulnerable areas are identified, companies can identify various ways to minimise these risks. The best course of action will vary on a case-by-case basis. The re-evaluation of supply chains due to covid-19 should focus on the same risk minimisation principles too. The worldwide trend towards deglobalisation should also be considered when altering supply chains as trade barriers such as tariffs could affect the cost of international supply chains in the future.
The most obvious way to minimise risk is to add diversity to supply chains by sourcing materials and products from a wider range of regions and companies. Adding diversity reduces reliance on a limited number of sources and as such minimizes the impact from any disruptions to supplier’s services. Diversity is certainly a supply chain buzzword right now and for good reason.
Alternatively, organisations which have strong established relationships with suppliers, may favour working with their supply chains to better understand their risks. Collaborating with suppliers not only helps to reduce supply chain risk, but also reduces costs, decreases production error and enables cooperation on other factors such as security and logistics.
3. Evaluate Strategy Impact
Both strategies are very different and each have their own merits, making them well suited to different organisations. But regardless of which approach is chosen, companies need to define ways to evaluate their impacts. Quality metrics can help a company to understand outcomes and impacts over time. This allows organisations to understand whether their approach is proving to be successful and if not, it gives them the chance to alter their actions accordingly. Risks scenarios should be regularly reviewed alongside any changes to the supply chain as preparation is the key to protecting against supply chain disruption.
Managing supply chain risk is essential for businesses going forward. Increasing the diversity of supply chains or simply solidifying strong supplier relationships and good practice, can allow businesses to access these benefits of global supply chains without putting themselves at the mercy of external influences. Covid-19 as provided an insight into what can happen to future global trade should these risks not be accounted for. It is now up to businesses to take action to protect themselves and safeguard their supply chains for the future.
Co-authored by Governex and Harry Vigus
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