Risk Management – an investment in future events
Risks within supply chains are known to exist, but often organisations show little action to understand or address them. Somehow, it is hoped, an inconvenient incident will be overcome and business carries on, although maybe with financial wounds.
There are three processes by which the performance of an organisation’s supply chain group should be measured:
- Providing Availability of goods and services for customers; achieved through the Sales & Operations Planning (S&OP) process
- The Delivery of goods and services to customers; measured by the probability of achieving Delivery in Full, On-time, with Accuracy (DIFOTA)
- Minimising Uncertainty through the organisation’s supply network by using a Risk Management process.
The aim of Risk Management for an organisation is to change unstructured Uncertainties into structured Risks. An Uncertainty becomes a Risk when a future event is structured as the likelihood of an event occurring, with the likely consequences if the event actually occurs. An Uncertainty can be external, but it could affect your supply chains. Uncertainty, caused by complexity, variability and constraints, also exists at nodes and links within your supply network.
Risk Management preparation
The value of preparation work in Risk Management is not known until an event happens. Preparation requires two sets of information:
- the organisation’s Supply Network Map and
- the Total Cost of Ownership (TCO) for items considered critical for the ongoing business
The Supply Network Map provides information that enables supply chain professionals to build future scenarios concerning an organisation’s trade lanes. To build a map, commence (if possible) with the customers’ customers and their demand patterns, then work back to the suppliers’ suppliers, identifying at least the following:
- Operational location of nodes and links in the Supply Network for customers, Logistics Services Providers (LSPs), including at logistics hubs and suppliers
- Direction and volume of Flows for items, money, data and information
- Lead times between nodes in the Supply Network; bottlenecks and wait times at border controls
- Ownership, control or influence exercised by parties at nodes and links in the Supply Network and any effects on contract outcomes
- Trading rules (including the effects of trade agreements) for each trade lane
The buy price of a piece part or a finished item is but one element of the Total Cost of Ownership (TCO) for a shipper. Due to input costs being held in different accounts, the task is not so easy, therefore Procurement professionals will need to work with corporate accountants to identify the TCO for critical items. A 2019 blogpost discusses Total Cost of Ownership
Risks in a Supply Network
Using information gathered through Supply Network Mapping and TCO, risks in an organisation’s supply network can be identified under four headings: External risks; Supply Network risks; Internal enterprise risks and Internal supply chain risks.
These risks were discussed in a blogpost two years ago, but health risks were omitted. Below is an update that provides some observations concerning the four risk types in a Supply Network:
External risks: disruptions that arise from interactions between a supply network, its supply chains and the wider environment:
- Physical risks: earthquake, tsunami and volcano
- Health risks: on a regional or global scale
- Climate risks: adverse weather events e.g. droughts, forest fires, storms (cyclones, typhoons and hurricanes) etc. attributed to global warming
- Environmental and Sustainability risks:
- Mandated by government – regulations that may affect supply chains concerning the ‘reCommerce’ of items. The ‘re’ terms are: repair, refurbish, re-manufacture, refill and recycle (including recalls, returns and rubbish)
- Industry specific regulatory changes e.g. emissions standards; use of eco-friendly packaging
- Availability and price of utilities (water, gas and electricity); includes the purchase or installation of renewable power
- Changes to consumer preferences – from users who buy to users who rent – risks of handling and processing over multiple recycling of items
- Geo-economic and Geopolitical risks: ‘the deployment of economic punishments and rewards to coerce nations to adopt preferred policies…Can apply to any country that is economically powerful (globally or within its region) and integrated into the global or region economic system’ (US Council on Foreign Relations)
- Sovereign and Country risks: Sovereign risks when a country’s government (through its central bank) fails to repay debts or changes currency exchange regulations which can affect contracts between parties. Country risks are concerned with investing or operating in a particular country
- Economic and Market risks
- Technology risks: introduction of disruptive and new technologies, including telecommunications
- Financial risks: availability and cost of trade finance; changes in exchange rates; import duties and taxation
- Risks to supply chains from changing consumer preferences e.g.
- origin of products and ingredients (‘clean and green’)
- labour hiring and working conditions in a supply chain
Supply network risks for inbound and outbound supply chains:
- Contingent risks: events within a supplier that could affect a supply chain e.g. fire at a supplier, financial viability of a supplier or cargo theft. Includes specific industry risks, such as a licence to operate by country e.g. use of radioactive materials; waste and recycling business location
- Interdependent risks: events through the links in a supply chain that could affect your organisation e.g. shortage of a raw material
- Power and Dependency risks: customers and suppliers that exert power (ownership, control or influence) over a supply chain or those that are dependent on a supply chain and therefore have increased risks
- Outsourcing and offshoring risks: transparency, response times, security and intellectual property
- Emergent risks: events in one industry (or company) that can affect demand and supply factors in other industry sectors, which supply your supply chains
- Cyber-attack risks: events at your organisation, customers and suppliers that can affect communication, data integrity and operations within your Supply Network
Internal enterprise risks: uncertainties associated with an organisation’s business model, business plan and the structure and execution of a supply chain strategy.
Internal supply chain risks: achieving consistent outcomes in the sourcing and planning of materials and resources and deliveries of products or services:
- Risks within Procurement
- Risks within Operations Planning
- Risks within Logistics, including OH&S risks
The breadth of data and information required of Supply Network Mapping, TCO and identifying risks in your Supply Network indicate that a major task lies ahead. It could be time to make contact with a university, to obtain the services of students to assist in data gathering.
Please note: Commencing on Monday March 9, the publication day for Learn About Logistics weekly blogposts will be on Mondays.