How to identify and reduce supply chain risks?

Managing your supply chain can be a complex task. While merely identifying potential supply chain risks is not always enough to avoid them, it should be reminded that the first step in supply chain risk management is risk identification. Among the many potential disruptions, we’ve listed below the most common issues underpinning supply chain operations to help you address them in good time.

The supply chain is often defined as the many stages in a product’s existence before it reaches the shop shelves or falls into the hands of the end customer. The supply chain is composed of a complex network of interdependent stakeholders, from production to delivery, all making up the various links in the chain.

For any company operating alongside multiple different logistical stakeholders, good supply chain management is a must. The more a business outsources, the more delicate this process becomes. To ensure optimal management of relationships and services, operational efficiency and responsiveness are no longer enough. It is essential to develop a logistics strategy that takes into account the various supply risks that may impact your business.

But what are these risks? How do you protect your business against them? What strategies can be adopted to limit their effects?

Which kinds of supply chain risks should you look out for?

In order to ensure quality standards, companies should have an overall view of their supply chain and maintain total control over it.

In a globalised world, where international competition is constantly intensifying, strengthening customer loyalty and establishing lasting relationships with suppliers is an increasingly complex task. Because of its knock-on effects, a single flaw in the logistics chain can be detrimental to a company’s reputation.

Within this context, the supply risks faced by businesses today are both internal and external.

Internal risks:

• project management issues.

• difficulties related to human or physical resources.

• IT deficiencies.

• planning errors.

Tackling these risks can prove easier, as they directly relate to the business’s internal management processes.

External risks:

• supplier sourcing problems.

• poor supplier management.

• lack of traceability for supplier payments in foreign currencies.

• terms of payment issues.

• delivery time issues.

• quality control shortcomings.

These can be more complicated to identify and tackle.

It is, however, important to bear in mind that risks can arise at every stage of the logistics chain. And while some are easier to monitor, others require special attention and constant collaboration with external stakeholders.

Some common internal and external risks

From internal risks like project management issues and IT and cybersecurity concerns, to external risks, such as insufficient external stakeholder capacity, supplier performance, environmental or regulatory changes, and lack of payment tracking capabilities, let’s take a closer look at some recurring risks in different areas of the supply chain.

1. Project management

Poor project management is one of the supply chain’s major risk factors.

Often the result of a misallocation of human or physical resources, it can undermine your operational efficiency and damage relationships with your suppliers.

There are, however, a number of best practices you can follow to guard against project management risks.

Each project manager should:

• be sufficiently well trained to carry out their activities while actively guarding against related risks.

• possess an in-depth knowledge of the project they’re assigned to and the major issues that define it.

• map out the logistics chain to gain an in-depth understanding of how it works.

• maintain the best possible relationships with suppliers.

• understand chosen suppliers’ operational processes.

• assess the impact of potential supply chain disruptions that may arise.

2. IT and security

As modern-day supply chain processes are largely computerised, care must be taken to ensure that IT systems meet the appropriate standards and are sufficiently secure.

Given the considerable value of supply chain data, it is of paramount importance to set up the necessary protections.

There are a number of best practices you can follow to guard against cyber-risks.
It is essential to:

• regularly assess the robustness of the IT systems used in order to identify possible shortcomings.

• evaluate the vulnerability of all connected devices, as well as web pages and company firewall systems.

• raise employee awareness regarding IT risks to avoid any unintentional leaks of sensitive data or information.

3. External stakeholders’ insufficient capacity

Demand for a product or service can shift rather abruptly. In some sectors in particular, such fluctuations can be difficult to predict.

Discovering, late in the game, that a key supplier is unable to meet your needs, especially when you are faced with a sudden increase in demand, can be very damaging.

To overcome this pitfall and limit dependencies, it is important to…

• try multi-sourcing, which will enable you to diversify your supply sources and distribution channels.

• consider vendor managed inventory (VMI) solutions to guarantee the sustainability of your production, though this option is sometimes costly and it requires careful management.

Having a strong relationship with suppliers is essential but might not be enough when it comes to getting products from point A to point B. Partnering with the right distributor and anticipating freight problems will help minimise some of the headaches that have been afflicting the ocean freight sector since the start of the Covid-19 pandemic.

4. Supplier performance

Once you have selected a given supplier, three factors are typically used to evaluate their performance: cost, quality of product or service and delivery time.

To ensure the highest quality from your suppliers, it is important to:

• provide regular feedback on the quality of service offered.

• continuously evaluate the competition in order to comparatively analyse your chosen supplier’s services.

• implement a stress test for your supplier, enabling you to assess the solutions they are able to propose in particularly strenuous times, as well as their responsiveness, their financial situation and their insurance and compensation conditions.

5. Environmental or regulatory developments

These types of development, which are beyond the control of supply chain, can also cause major disruptions.

When dealing with environmental or regulatory changes, it is important to constantly remain informed. Only then will you be in a position to anticipate the potential risks that may arise. The effects of changing trade agreements between countries can quickly trickle down to importing and exporting businesses. Being up to date with the latest identification and registration requirements such as the EORI number when trading within the EU is essential for companies who do not wish to see their business disturbed.

Implementing a comprehensive monitoring process is a good way to avoid being caught off guard.

To do this, you will need to:

• carefully follow relevant information sources on logistics regulations in all the regions where your suppliers operate.

• remain abreast of geopolitical developments in areas that are potentially more volatile in terms of regulation.

6. Lack of supplier payment traceability

The issue of payment is a decisive aspect of the customer-supplier relationship. The strength of this relationship depends on both the regularity and speed of payments.

A lack of transparency or traceability from your payment service provider or payments solution can negatively impact this relationship.

To maintain supplier trust when it comes to payments, it is important to:

• respect the terms of payment negotiated with them.

• keep them up to date on the payments you have made, as well as your current and projected supply needs, all the while suggesting ways to optimise the profitability of your relationship.

• choose a payment service provider (PSP) that offers greater transparency, notably through solutions that allow both parties to track payments in real time.

While the risks outlined above may not be exhaustive, they offer an overview of the dangers faced by all businesses that rely on external stakeholders within their supply chain.

How do you set up your supply chain strategy?

A comprehensive strategy should take into consideration all of the potential hazards specific to your own supply chain and your field of activity.

But how should you go about developing such a strategy?

It is crucial to identify your suppliers’ potential weak points, anticipate possible supply chain interruptions and set up a continuity plan to deal with adverse situations.

1. Identify weak points

This ultimately means evaluating your suppliers’ performance and seeing where there is room to improve. Anticipating potential problems allows you to provide a better response.

Given the complexity of logistics flows, it is essential to:

• set up precise KPIs for your suppliers, with the ultimate goal of ensuring optimal quality for the end customer.

• carry out stress tests to measure their responsiveness in times of increased strain or unpredictability.

2. Anticipate interruptions

Unanticipated supply chain interruptions can take many forms. One way to avoid them is to:

• adopt a quality assurance approach against the risk of needing to recall a faulty product.
  

• implement collaborative planning processes, ensuring that all stakeholders are kept informed of sales forecasts and developments therein.

• diversify partners so that bumps in the road can be swiftly avoided and do not grow into full-blown cracks damaging the entire supply chain process.

3. Develop a continuity plan

Even when you have seemingly anticipated all possible disruption scenarios, supply chain resilience can still be compromised by an unforeseen eventuality. To avoid this as best as possible, consider the following:

• Develop a continuity plan in advance and update it regularly, taking into account any new risks and implementing the necessary provisions.

• A continuity plan should go beyond mere collaborative planning processes and include a host of potential responses to predetermined disruption scenarios.

• This will require the voluntary cooperation of all supply chain stakeholders, including your suppliers.

The supply chain is a complex ecosystem involving a number of mutually dependent parties. The success of many businesses depends, in no small way, on the proper management of their logistical processes. This ultimately allows a business to maintain positive relations with its stakeholders and guarantee the sustainability of its activities.

Adopting a proactive stance and closely monitoring suppliers’ and distributors’ performance are essential steps to limiting supply chain risks. In addition, instating collaborative planning processes makes it possible to anticipate potential disruption scenarios and limit their effects. On top of this, the development of a continuity plan will help prepare businesses for a variety of possible logistical breakdowns, enabling them to implement solutions that ensure relatively unhindered operational continuity.

Payment and the management of your payments are also aspects of your supply chain to keep in mind. While paying your suppliers in their local currency will undoubtedly put you in their good books, paying them in a timely manner will also help strengthen loyalty and consolidate the relationship. Prompt payments can also cut down on delivery times, as receipt of payment is often the condition under which a supplier will begin production or dispatch your order.