What Is Risk Management in the Supply Chain?

Written by Rebecca Turley

What is risk management in the supply chain? Managing risk in the supply chain is a systematic process that involves identifying and assessing vulnerabilities and threats to an organization’s end-to-end supply chain and then developing and implementing strategies to build resilience against those threats and vulnerabilities.

stopping dominos from falling

Getting out in front of it—risk management in supply chain management is about addressing issues when you first smell smoke, long before the fire breaks out and leads to delays, disruptions, a tarnished brand reputation, unhappy customers, and a serious hit to the bottom line.

Supply chain risk management isn’t limited to any one area. It extends from the first link in the supply chain to the last. Risk will always be part and parcel of conducting business as part of the larger supply chain. Risks can never be eliminated, but they can be managed. But first they must be identified.

Internal Risks

Internal supply chain risks are those within an organization that can be identified, assessed, and continuously monitored and are therefore easier to manage. Internal risk factors are often the result of:

External Risks

External risks are trickier to predict because they come from sources outside an organization. Companies don’t have much control over them, making them more difficult to mitigate. These may include:

Getting Out Ahead of It: Tackling Supply Chain Risks Before They Become Major Issues

woman in maze

What’s a supply chain manager to do when a risk is identified? That all depends…

SCM pros consider one of four supply chain risk management strategies:

Avoidance -

Of course, the best way to handle risk is to eliminate it – or at least reduce its likelihood. The use of cybersecurity technologies to avoid a cyberattack, avoiding workplace injuries by conducting regular staff safety training, and preventing theft by installing a reliable security system are all good examples of risk avoidance.

Transfer -

Not all risks can be avoided. In these instances, companies can protect themselves by transferring the risk. Carrying adequate insurance that would cover losses in the event of a fire or flood is a good example of risk transfer.

Mitigation -

SCM professionals can mitigate risk by implementing measures to reduce the likelihood or severity of a threat. Companies who make concerted efforts to diversify their supply chain is a great example of risk mitigation.

Relying on a single vendor, supplier, and other supply chain partner can wreak havoc if a disruption occurs with their business operations. Working with a diverse range of supply chain partners allows organizations to minimize supply chain disruptions while also stimulating healthy competition. It also creates an environment where new ideas and perspectives for solving problems in the supply chain flow freely.

And there’s another perk to maintaining diversity in the supply chain. Doing business with supply chain companies that are owned by underrepresented groups and/or are committed to social causes, sustainability and environmental responsibility, and fair labor practices signifies a company’s dedication to social responsibility and inclusivity and can make a big difference when building brand reputation.

Acceptance -

In some instances, businesses may decide to accept certain risks as a cost of doing business. In other words, the potential loss doesn’t merit the money, time, or resources it would take to avoid the risk. Most of the time, risk acceptance includes frequent and small risks which, should they cause problems, can be remediated without too much disruption to the supply chain. However, it may also include accepting more significant risks when the cost of avoiding the risk is much greater than its potential impact.

How the U.S. Government is Using Risk Management Strategies to Protect the Nation’s Supply Chain from Cyberterrorism

national cyberterrorismOur nation’s economic prosperity and national security depend on resilient and secure supply chains. While the COVID pandemic exposed our supply chain vulnerabilities, a worldwide pandemic isn’t the only thing that can cause great upheaval and turmoil to our supply chains. Everything from geopolitical and economic competition, extreme weather events, and biological hazards can jeopardize the health and vitality of our supply chains. However, the federal government has recently highlighted cyberterrorism as the preeminent danger.

The National Counterintelligence and Security Center’s (NCSC) publication, The National Counterintelligence Strategy of the United States 2020-2022, outlines cyber threats and the role that risk management plays in mitigating the risk of attacks to our nation’s supply.

According to the NCSC, cyber threats represent a “complex and growing threat” to the United States. Because foreign adversaries can attempt to infiltrate the nation’s supply chains at all points by implanting malware into our IT networks and communication systems, they have the power to disrupt any of the country’s economic sectors and critical infrastructure. Protecting the nation’s supply chains becomes even more challenging because many of these networks and systems operate using foreign-owned or controlled hardware and software.

Cyberterrorism exploits our vulnerabilities and wreaks havoc on the integrity, trustworthiness and authenticity of products and services used in government and private industry. Vulnerabilities even extend to our military’s critical networks and systems, making us particularly vulnerable to protecting ourselves in a time of crisis.

Given the sheer magnitude of cyber threats to our supply chains, the NCSC stresses the importance of implementing three, major risk management strategies:

Enhance Capabilities to Detect and Respond to Supply Chain Threats: We must find new sources of information to increase our ability to identify and assess foreign intent to disrupt U.S. supply chains. This includes implementing new ways to identify companies, products, software, and services that may be particularly vulnerable to cyberattacks.

Advance Supply Chain Integrity and Security across the Federal Government: We must constantly integrate risk management practices to safeguard our technology and services. Vital activities include creating a shared repository of risks to the supply chain, addressing deficiencies in the federal acquisition process, and implementing a series of checks to exclude high-risk vendors.

Expand Outreach on Supply Chain Threats, Risk Management, and Best Practices: We must constantly seek to foster strong partnerships with all levels of government. This includes sharing supply chain threat information and mitigation efforts.

Creating a Risk Management Roadmap for Success

The term “resilient” is a favorite buzz word in the supply chain management field. Sure, there’s going to be disturbances in the supply chain; when there’s that many moving parts, there’s bound to be issues that cause supply chain managers to scramble to find solutions. But there are strategies that can be put into place to prevent catastrophic supply chain issues and create a supply chain that’s resilient enough to withstand nearly every issue that’s thrown its way.

Proactively monitoring and managing your supply chain is an essential part of risk management. Supply chain management professionals who identify and assess potential risks must also have contingency plans in place to mitigate them.

How SCM Professionals Put Risk Management into Action

Risk management programs serve as the blueprint for how companies identify, analyze, and respond to risks as they occur.

A risk management program includes the processes and methods used to identify risks, assess their likelihood, create appropriate mitigation strategies, and monitor them.

A solid risk management program involves the following steps:

  1. Identify potential risks. Both internal (e.g., personnel changes, ineffective management, supplier problems, etc.) and external (e.g., natural disasters, political instability, raw material shortages, etc.) risks must be considered.
  2. Conduct a comprehensive assessment of risks by assessing their likelihood and potential impact on the organization. In this step, SCM pros analyze the probability of each risk and prioritize them based on their likelihood and impact. Activities include documenting and prioritizing risks, assessing the company’s risk tolerance, instituting metrics that can be tracked, implementing specific protocols, and allocating resources to respond to disruptions as soon as they occur. While some companies prefer to keep these activities in-house, many others contract risk assessment to third-party auditors.
  3. Implement risk management strategies. Before solid risk management strategies can be put into place, supply chain management professionals must have a clear understanding of the capabilities of their supply chain partners. This can be accomplished by conducting due diligence on the business operations of their supply chain partners, developing clear contracts with partners, building stronger relationships with suppliers, and monitoring supplier performance.

    When risk management strategies are implemented, resilience in the supply chain naturally follows. The strategies implemented, however, may look quite different from one company to the next. For example, one organization may stock critical supplies to ensure an adequate inventory should a disruption occur. Another organization may have a production system in place that allows production volumes to quickly change to meet the ups and downs of consumer demand.

  4. Monitor your risk management plan and update it regularly. Risks are fluid and always evolving, so it’s important for supply chain management leaders to ensure supply chain visibility. Supply chain managers may use any number of cutting-edge tech tools and techniques to conduct regular risk assessments and identify patterns and trends in the supply chain. Machine learning algorithms, predictive analytics, and data-driven processes allow companies to identify disruptions or bottlenecks more quickly and more accurately than ever.