As an executive to your organization, you know that supply chain performance has a direct impact on your bottom line. From balancing supply and demand, to managing inventory availability to managing a distribution network, even the slightest interruption can affect whether or not you have a profitable quarter. Therefore, it’s crucial to manage the risks of your supply chain. You must continue to drive efforts to reduce costs and manage working capital more effectively and become leaner, providing less margin for error.
In today’s landscape, responding to issues by “putting out fires” as they arise, is no longer good enough. It’s not an effective way to approach risk management. Here are a few tips to help you minimize the risk of supply chain disruption.
Segment the supply chain.
Many companies can segment their supply chains to improve profits and reduce supply chain fragility. For high-volume commodity items with low demand uncertainty, the supply chain should have specialized and decentralized capacity. In other words, source from multiple low cost suppliers. This reduces cost while also reducing the impact of a disruption at a single location, because other suppliers will be producing the same item.
Ebb and flow risk management.
Supply chains should change over time in response to product life cycles or experience in a new market. Early on, when sales are low and demand is uncertain, managers can pool recurrent risk and minimize supply chain costs by centralizing. As sales increase and things become more certain, capacity can be decentralized to become more responsive to local markets, reducing the risk of disruption.
Consider upstream supplier relationships.
It’s important to consider upstream relationships including the second- and possibly third-tier suppliers for strategic suppliers and categories. The business’s supplier relationships and the supporting network are just as important as its internal processes and systems because they are inseparably linked to what makes the business model work. Therefore, assessment of operational risk should be directed to understanding the risk of loss of any critical link in the supply chain.
Assess the potential impact of a supply disruption.
Most importantly of all, you should assess the impact of a potential supply disruption, so that you’re better prepared in the event that something happens. Do this by asking yourself the following questions:
- How well is our organization monitoring the supply chain, and how quickly can we identify a potential issue?
- How quickly would the initial disruption be felt?
- How long would be affected if the disruption continued?
- How robust would we be in reacting to the loss of any significant supply source?
Keeping the answers to these questions in mind allows you to assess the immediate impact to the supply chain (in terms of both supply outage and financial impact), determine the expected recovery time, and implement predefined and tested response plans to minimize impact of disruption.
By working with management and the board to address these questions, you can make significant strides in advancing supply chain risk management.
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