Risks of Supply Chain Management

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Buisness leaders are responsible for identifying, and when possible, minimizing supply chain risk.
Buisness leaders are responsible for identifying, and when possible, minimizing supply chain risk. (Image: Jupiterimages/Photos.com/Getty Images)

Every business, no matter what type and in what industry it operates, is vulnerable to risk. Those risks can come from within the business, from outside, due to a rise or fall of their customer demand, or from the supply chain itself, which provides the raw materials and energy that underlie the business production of goods or services. It is the responsibility of business leadership to identify the risks, evaluate the potential damage they represent and, whenever possible, to mitigate the effects of those risks to business operation.

Identifying Supply-Side Risks

Supply-side risk includes factors such as sudden scarcity of raw materials and resulting rising costs due to increased demand from competitors. There may be risk related to human factors, like political events such as revolutions or transportation worker strikes that slow delivery of raw materials to your production plant. Sudden crisis may interrupt distribution and delivery of materials due to energy shortages brought on by high demand. Natural or man-made disasters impede production, such as Japan has experienced due to its 2011 disaster combining earthquake, tsunami and nuclear reactor crisis. The triple disaster brought its semiconductor and auto manufacturing industries to a virtual standstill with ripples world-wide.

All Risk is Not Equal

Not only should business leaders be aware of the possible risks to their supply chain, but they should seriously weigh the impact of the loss or disruption of each to their specific business operation. In recent years, the availability of water and the disruption of energy creation or distribution has been a concern world-wide. While an energy crisis and power brown out or blackout might slow the delivery of steel by train to a manufacturing plant in Ohio, it might be devastating to the co-op moving spinach via refrigerated rail car between Fresno and San Antonio. One product could be destroyed, while the other would simply be delayed.

Just-in-Time-Delivery Can Heighten Supply Chain Disruption

The fairly recent phenomena called “just-in-time-delivery,” may increase the risks of supply-side management. It is the delicate distribution method that delivers goods to plants or stores as needed, reducing the need to maintain high, local inventory. It works well, especially for retail settings with computerized reorder systems, or manufacturing plants with sophisticated delivery and shipping logistics, as long as crisis events don't occur. A retailer, facing a blizzard, may see its shipment of generators and snow shovels stuck on a semi truck in the storm, missing the sales opportunity that season. Homeowners facing an approaching hurricane with only a few hours to board up their homes can't get to plywood 300 miles away in a wholesale warehouse. But manufacturing plants in the same storm may simple delay raw materials shipment, reducing their risk of loss.

Planning Minimizes the Impact on Supply Chains

Smart planning by business leaders may not eliminate risk but can minimize the effects and help avoid the worst impact of major economic, environmental or political upheaval. Every business should have a contingency plan that identifies alternatives before you need them. With your management team, ask “what if” questions that address both major and minor urgency for your category of business or industry; “What if we suddenly lost main and backup power for longer than 48 hours?” “What if there was a (insert major weather crisis)?” “What if the price of gas doubles in price?” “What if our primary supplier suddenly reduces our source of (name your primary raw material)?” With answers to questions like these in mind, review your logistics procedures regularly. This will sharpen your thinking, hone your coping techniques and minimize potential for surprises to creep up on you.

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