The Supply Chain Risk Management Plan
In a 2013 study by the Institute of Supply Management, it was found that 60 percent of firms had a supply chain risk management plan in place and another 11 percent were actively developing their plan. Flash forward to today and it would be interesting to know if those numbers have increased. The global market is more volatile and competitive than ever and the demand for products has only grown as margins continue to shrink.
A supply chain risk management plan is a strategy to speed response to as many circumstances as can be predetermined so as to minimize disruptions to the supply chain if they were to occur. According to The Network Effect, these circumstances may be “natural disasters, counterfeit products, theft, supplier delay, production interruptions, part shortages, and even cyber security.” While these risks happen frequently, other risks may appear less emergent yet are equally destructive. These may include changing market conditions, the competition gaining market share or operating at lower costs, or evolving customer tastes.
Companies must be nimble. They must always have an eye on margins, costs, and quality. And of course, they must keep their customers happy. One, even seemingly small, disruption to the supply chain can have a ripple effect that ultimately affects any of these variables. The supply chain risk management plan is, therefore, crucial for any organization who is dependent on others for their success. Suppliers, distributors, manufacturers, and retailers are the primary stakeholders in the supply chain. From raw materials to parts and carriers, they all must work synergistically in order for the end consumer to get what they expected, when they expected it.
Preplanning Comes First
Developing and implementing a supply chain risk management plan takes time, but the result can be the difference between a company folding due to a crisis or persevering despite the odds. Before a plan can be created, it’s important to follow the following preplanning steps. The information these steps produce will ensure the supply chain risk management plan is comprehensive, accurate, and reliable.
Step 1: Assess Risks
In order to know what to plan for, you must gain visibility into the potential risks. Every link in the supply chain has to be considered, as well as each of their risks. Natural disasters, weather-related events, foreign economic instability and all of the variables mentioned above could result in delays, higher costs, and decreased sales and customer satisfaction. Some risks are difficult to anticipate, but even the most unlikely should be added to the list. Historical references are always welcomed as they add much-needed lessons learned.
Take the most recent government shutdown as an example. For most companies, the government shutdown was not a new phenomenon. There was another shutdown in 2013 that impacted many firms. The Institute for Supply Management released a supply chain risk management study in 2014 that referenced the 2013 government shutdown. They found 52 percent of respondents said their firm’s performance was impaired by the government shutdown and the majority of those that activated their plan missed minor risks, such as delays in government inspections. With this experience and hindsight in mind, those firms would likely confirm their supply chain risk management plan included a government shutdown and delays in government inspections as a risk factors.
Many risks will be highly dependent upon the location of the company, its suppliers, distributors, manufacturers, and retailers. Other risks are more general, such as cyber threats and changing industry trends. Once the risks are determined as best as possible, it’s time to move on to step number two.
Step 2: Quantify Risk
This phase is where the likelihood of each risk and its potential impact on the supply chain is assessed. Some risks may only cause minor interruptions, whereas other risks could spell disaster. For each of the risks assessed, scores may be applied to represent the likelihood of it occurring and its severity. By assigning each risk a quantifiable number and/or color, it helps key staff visualize and prioritize the threats.
Step 3: Build Contingencies
Step three is all about response. By building “what if” scenarios, companies can role play to determine who and how they would respond to each event if it were to happen. These responses could be as detailed as the company is willing to make it. From a role-by-role flowchart with strict protocols to a more simple series of actions that would occur in anticipation of an event, during an event, or after the event occurs.
By modeling situations, companies will be able to respond much faster than if they were to “wing it” when something happens. These scenarios can be a powerful learning tool and help stakeholders execute the plan with confidence.
Now that the risks are assessed, the scenarios are modeled, and the responses are documented, it’s time to make the plan. Every plan will be different, but the following are some of the most common line items:
- A list of qualified alternate suppliers
- Communication protocol with critical and major suppliers (first thru fourth-tier suppliers)
- Qualification of more suppliers
- A surplus of critical supplies
- Communication protocols with critical and major clients
- Assistance to critical suppliers
Ideally, the plan should be reviewed every six months or annually as suppliers can frequently change, however, many organizations admit they wait until it is deemed necessary. This may be too late, after the company has already been negatively impacted.
One of the more critical components of any supply chain risk management plan is to analyze transportation and routes. Freight is vulnerable to all kinds of risks, from weather-related events to infrastructure outages.
Just as with the other supply chain risk preplanning, assessing risks with shipping is the first step, followed by quantifying those risks, and then building contingencies. Depending on the freight and route, this can be a grueling, manual process that is often half-baked and inaccurate. There are a lot of assumptions and guesses, but most of all, there’s simply not enough data.
Following a shipment from pick-up to final delivery reveals just how dynamic that part of the supply chain can be. The weather, outdoor temperature, infrastructure, traffic and other variables along every mile of the route can impact the ability for that product to be delivered on time and as expected. The only way to accurately track these ever-changing risks is by leveraging sophisticated technology.
Technology has the inhuman capability to continually pull large amounts of data from multiple sources in real time, then present it in a visual way to give companies a complete picture of their risks, the probability of those risks during every leg of the journey, and the severity of those risks. By making the data operational and graphic, companies can literally “see” any issues. Dashboards can be customized to answer specific questions and identify current problems and potential issues up to 10 days ahead.
Questions can be answered such as:
- What are the risks to each shipment from the time the goods are packed onto trucks, railcars, airplane or ship until they make it to their final destination?
- How likely are those risks and what would their impacts be?
- How would we respond in each case?
- What would trigger the plan?
- What is the prescribed flow of response?
- Would changing the mode of transportation, the route, or the timing of the shipment reduce the risk without adding significant cost?
With the right data at the right time, companies can make the right decisions. No matter the supply chain, risks can be averted or, at least, minimized. By doing so, organizations not only have the potential to save costs but ensure on-time delivery to maintain customer satisfaction and share of wallet. If, however, risk cannot be avoided, appropriate expectations can be set to at least make the customers aware of the potential delays so they can plan. Data is power. It is a competitive edge. Leverage it correctly and risks can turn into a competitive opportunity.