When supply chains suddenly became the topic of everyday conversation a couple of years ago, it wasn’t a good sign. Many had been stretched or broken by the events of the day, from a pandemic-related surge in demand for consumer goods to an abrupt labor shortage. Supply chains are supposed to run in the background but were thrust into the spotlight as people just couldn’t get what they wanted, when they wanted, at the level of quality they had come to expect.
Today, various supply chain risks continue to emerge and disrupt, from the onset of inflation to the outbreak of war. Volatility has become the norm, so businesses have to employ supply chain risk management strategies with a new sense of urgency.
What Is Supply Chain Risk?
Supply chain risk is the possibility that unexpected events could disrupt your organization and its network of business partners as they move materials, components, and final products from their original sources, through fabrication, and to the end customer. Here are eight common supply chain risk scenarios:
- Inflation throws off your cost of materials, components, and transport.
- Recession drives a supplier or customer out of business.
- Extreme weather snarls shipments in hurricane season.
- Cybercrime exposes your operations to a crippling data breach via unprotected partners.
- A disease outbreak impacts consumer demand or labor supply.
- A new trade barrier adds costs, complications, or delays to overseas shipments.
- Geopolitical conflict jolts product prices and disrupts availability.
- Environmental, social, or governance issues raise regulatory compliance and reputational concerns.
What Is Supply Chain Risk Management?
Supply chain risk management involves what-if scenario planning exercises that identify and rank risks according to their probability and potential impact on your business. The goal is to avoid risky situations where possible or have a plan to limit the impact if risk becomes reality.
Every company operates as part of a supply chain, whether purchasing the goods or services needed to conduct their business, selling goods or services to another company, or both. So all companies face supply chain risk – but smaller companies are especially vulnerable. For instance, smaller companies may not have as much cash on hand to ride out a disruption, or they might be boxed out of the bidding if suppliers favor companies with deeper pockets when times get tough.
Whatever volume pricing or other benefit may come from putting all your business’s eggs in one supplier’s basket, you should weigh it carefully against the risk that the basket breaks.
No matter the size, the ultimate measure of a supply chain is its ability to profitably meet customers’ expectations for price, quality, and timely delivery. But today’s supply chain risks can challenge businesses on all three fronts. Inflation is causing many companies to raise prices or take shortcuts that lower quality. Delays persist in some logistics, such as warehousing, even as they ease in others, such as overseas shipping. And there is little visibility into what the future might hold for these and other important links in the supply chain.
If volatility is here to stay, as the experts say, this landscape needs to be continually monitored, with supply chain management strategies frequently reviewed and updated.
What Are the Common Supply Chain Risks?
Out of all business issues, smaller companies today are most concerned with the one-two punch of inflation and supply chain risk, according to the MetLife & U.S. Chamber of Commerce Small Business Index, which surveyed 750 small-business owners in October 2022. In this environment, here are six of the most common traps that create risk for supply chain and procurement executives:
1. Single Sourcing
The rule of thumb in supply chain risk management is that a single source of a product or service represents a single point of failure. Whatever volume pricing or other benefit may come from putting all your business’s eggs in one supplier’s basket, you should weigh it carefully against the risk that the basket breaks.
2. Global Sourcing
Similarly, relying on goods shipped from a single region means counting on political and economic stability in that part of the world. Best practice is trending toward sourcing from more than one country or region – and the closer to home base you source, the less exposure you have to logistics issues.
3. Fixed-Price Contracts
In inflationary times, fixed-price contracts can elevate risk, especially if you’re a supplier to larger companies. And if you set out to renegotiate prices or payment terms, be prepared: bigger businesses usually have more bargaining power than you do.
4. Just-in-Time Sourcing
To lower risk, this long-popular approach to running “lean” supply chains is now giving way to more flexible just-in-case habits like ordering product earlier and keeping extra inventory on hand.
5. Communication Gaps
Underestimating the importance of an ongoing flow of communication with suppliers and customers can expose your company to sudden supply and demand shocks. Relationship-building, on the other hand, can help ensure you aren’t bumped out of line by an order from a bigger company.
6. Lack of Visibility and Foresight
Knowing your supplier is a good thing, but it’s also become increasingly important to understand the financial and operational strength of your supplier’s suppliers, who pose less obvious but no less significant supply chain risks. And in logistics, it isn’t helpful to rely on old assumptions based on the fact that shipping and warehouse pricing was fairly stable for years when, “those days are past,” as Harvard Business School Professor Willy C. Shih recently wrote.
Supply Chain Risk Management in Changing Times
Most small businesses’ supply chains have been dramatically disrupted since the COVID-19 pandemic, according to the Small Business Index, and over half have altered their supply chain to rely more on local suppliers in the last year. The business owners in the survey have also responded by diversifying suppliers, renegotiating supply chain contracts, adjusting inventory levels, redesigning products to use more readily sourced materials and components – and raising product prices.
Professor Shih has a suggestion for companies thinking through how to manage their current challenges and reduce further risk of disruption: “Rather than tweaking a few things here and there, look hard at what you do and start with a blank canvas,” he wrote. Ask yourself whether you can address supply chain risk differently using smarter, more effective, more environmentally sustainable approaches.
At the nuts-and-bolts level, the Young Entrepreneur Council recommends reducing risk by:
- Keeping track of stock
- Increasing inventory if possible
- Considering alternative suppliers
- Using digital tools
- Maintaining open relations with suppliers and customers
- Staying informed
- Preparing for the next supply chain disruption
Technology plays an important role in supply chain risk management, including software to track planning, logistics, production, and other related business functions. Cutting-edge innovations such as predictive analytics and artificial intelligence are increasingly used to model supply and demand. A company’s size will often determine how much it invests in supply chain management technology, but even AI is becoming more affordable for smaller companies.
The Takeaway
Small and midsize businesses face outsized risk in their supply chains due to inflation, labor shortages, global conflict, and other issues beyond their control. Still, supply chain risk management strategies can help lower your exposure to the volatility in today’s business environment, helping to keep your company on track.
Photo: Getty Images
