What Is a Supply Chain Risk Assessment Checklist and Why Do You Need One?
The purpose of a supply chain risk assessment checklist is to ensure your organization follows certain steps to better understand its risks and the potential impact of those risks on the business. According to ISO, an independent, non-governmental international organization that brings together experts from around the world to develop International Standards, a risk is any type of internal or external factor and influence that makes it uncertain whether and when an organization will achieve its objectives.
A risk assessment is the best way to identify internal risks, as well as external risks presented by supply chain partners who have a significant impact on your company’s ability to meet its commitments to produce and deliver quality products. Risk identification is considered the most important activity of a risk assessment, because a company cannot manage a risk it doesn’t identify. There are two parts to risk: the consequences of an event and the associated likelihood of an event occurring.
What Is on a Supply Chain Risk Assessment Checklist?
The supply chain risk assessment checklist begins with establishing how your organization defines risk within the context of its specific market and industry. From there, the assessment moves along a continuum that includes risk identification, risk analysis, risk evaluation, and risk mitigation or treatment.
During the process, all of the data is continually monitored and reviewed, keeping in mind that risks and their potential impacts change and evolve over time. Because risk is never static, neither should your supply chain risk assessments. It is important to conduct these assessments regularly, whether a change event has already occurred or is expected to occur.
Risk identification is part brainstorming, part interviewing, and part gathering data from different systems of record. Risks can come from anywhere, but the primary risks to the majority of organizations fall under these categories, as identified by ISO:
- Physical failure (functional failure, incidental damage, malicious damage, or criminal/terrorist action)
- Operational threats
- Natural environmental events (weather, natural disasters)
- Third-party threats
- Security threats
- Business continuity threats
Other sources include geopolitical threats, reputational risks and financial risks in their risk assessments.
As you begin to analyze the identified risks, you are looking to qualify the causes and impacts of each risk. For instance, as a shipper, you want to know all of the causes of shipment delays and what effect those delays have on your ability to meet your commitments.
You must define what is an acceptable risk both in terms of its likelihood and its potential impact on the business. The business impact is rarely isolated, as there is almost always collateral damage. A University of Maribor report on the risk assessment model says, “If we wish to effectively manage risks, we need to be aware of logistics sources that a specific risk and its consequences possibly affect.”
A flooded shipping route, for example, could impact your ability to ship products on time, which impacts customer service and your brand reputation, but it also affects inventory management and operations. If you can’t ship, you have to pay to store that material which could raise costs and present a warehousing issue.
After risk identification and analysis, the next item on your supply chain risk assessment checklist is to evaluate the risks in a quantitative way in order to help you make decisions on how best to treat those risks or whether they need to be managed at all. You won’t be able to prioritize risks until you are able to accurately quantify the risks based on their probability and impact.
Risk probability is often defined as “highly unlikely,” “unlikely,” “possible,” “very possible,” and “definite.” Risk scoring is even more precise, calibrating risk with a numerical score. The easier and faster leaders can understand the risk they are dealing with, the quicker they can make decisions with a higher level of confidence.
Risk impact can also be factored in, providing a number that correlates with a risk impact being “trivial,” “low,” “moderate,” “high,” or “catastrophic.”
McKinsey says there is another dimension to risk, one that also contributes to the risk score: the organization’s preparedness to deal with that specific risk. Some organizations are able to manage certain risks better than others, either because of their established best practices, their technology, their people, or their budget – sometimes a combination of more than one of these components. If your organization lacks technology that automates these checklist steps, for example, it will take it longer and require more resources to do the same work.
Scoring, based on a consistent methodology, helps leaders to visualize risks so they can determine their next action. As McKinsey says, “This allows for prioritizing and aggregating threats to identify the highest-risk products and value-chain nodes with the greatest future potential.” Monitoring these risks will ensure you have an early warning system in place to track prioritized risks so you can respond quickly.
Risk treatment is next on the supply chain risk assessment checklist. You can avoid some risks altogether, while others can only be mitigated. Again, it depends upon the risk, its probability and impact, and your organization’s ability to manage it.
You must determine your organization’s thresholds for action. What will your organization tolerate in terms of impact and likelihood for each identified risk? Which risks can your organization confidently avoid or mitigate? Even those risks that appear to be out of your control, such as those that fall into the natural environmental events, can be more predictable with the right software. Remember, if you can predict a risk, you have a better opportunity to avoid or mitigate the risk.
Modern software does an excellent job at automatically and rapidly gathering data from disparate systems to identify, analyze, and score risks, as well as providing lower-risk alternatives. Instead of multiple resources spending days or even weeks on these critical assessment steps, you can focus on other things and let the software crunch the numbers for you. Leaders need only to look at the customized reports and dashboards to make data-backed decisions, saving everyone countless hours of work and providing a higher level of confidence in decisions.
Managing The Known and Unknown
Today’s supply chains are more complex as ever. It is imperative to build a framework to manage supply chain risks, both known and unknown. Risk assessment is never once and done. It is a repetitive process that involves different types of changing data. Organizations that seek to reduce supply chain disruptions must find ways to reduce their risk, using actionable, predictive intelligence as their foundation.