Supply Chain Risk Management
Disasters don’t announce themselves when they come and mostly catch people unaware. This is also true for business organizations causing enormous losses and often organizations perish because they had not carried out their risks and threats analysis when the going was good and the business continuity plan was not put in place judiciously within the organizations.
Impact of external and internals risks have become more pronounced after the globalization and supply chains of organizations now extend beyond the boundary of nations. It is now a flat world’ a word coined by three times Pulitzer award winner Thomas Friedman in his famous book ‘The world is flat’.
The subject of risk management has become more complex as Enterprises largely do not have their control on their vendors and suppliers downstream in the supply chain.
There are two types of risks, one where company does not have any control and are known as external risks while the other one known as internal risks can be controlled by companies.
External risks can be driven by events either upstream or downstream in the supply chain:
- Demand risks related to unpredictable or misunderstood customer or end-customer demand.
This requires continuous interactions with the customer by the Sales Team and providing feedback to the Company.
- Supply risks related to any disturbances to the flow of product within your supply chain.
These risks can be mitigated by making the supply chain as agile, responsive and synchronized through use of technology and managerial control by taking care of four parameters viz Quality, efficiency, innovation and responsiveness to customers.
- Environment risks that originate from shocks outside the supply chain.
A disaster recovery and business continuity plan is chalked out by organizations to build back up and redundancy in the system to minimize damages caused by such environmental risks like earth quakes, Sunami like disasters etc. ONGC has built up their computerized disaster recovery back up between Delhi
- Business risks related to factors such as suppliers’ financial or management stability.
Multinational companies before choosing their suppliers thoroughly evaluate the internal operations of the suppliers to establish whether they are sound in terms of stable financial and managerial foundation.
- Physical risks related to the condition of a supplier’s physical facilities.
Big Companies do thorough investigations of the physical facilities of their suppliers before zeroing in and have tie ups with them and establish long term relationship with them treating them as partners and do not ditch them. Tatas while planning the supply chain of their NANO car selected a team of dedicated suppliers who were planned to be physically collocated near their automobile factory and risked even to shift their plant from Singrur to Gujarat and Pant Nagar because they were not ready to locate their suppliers physically distant once Mamta Bannerjee refused to allocate the land to Tata’s suppliers planned to be located in close proximity to the plant.
Having had an overview of external risks, now let us have a look on internal risks.
Internal risks are driven by events within company control:
- Manufacturing risks caused by disruptions of internal operations or processes.
These risks can be minimized by an approach of Total quality management and six sigma where a dedicated and motivated workforce through use of technology and human resource management create as set up which is not prone to break up in internal operations and processes.
- Business risks caused by changes in key personnel, management, reporting structures, or business processes.
Companies like Maruti Suzuki have realized the importance of human capital and emphasize on an agile and flexible reporting structure and have the succession plan well in place.
- Planning and control risks caused by inadequate assessment and planning, and ineffective management.
Companies implement renowned ERP software like SAP and Oracle to get the benefit of best practices of enterprises and through seamless flow of information on digitized infrastructure of LAN and WAN minimize such risks.
- Mitigation and contingency risks caused by not putting in place contingencies.
Companies do not hesitate now in making investments in disaster recovery and business continuity plans through a back up set up which takes over during the fault in main set up.
To effectively evaluate risk strategy and implement supply chain risk management, companies must balance the cost of mitigation with available resources and optimum cost management objectives. The risk management strategy should apply to everyone at all levels in the organization and focus on achieving the company’s business objectives.
Written by Professor Akhil Chandra
