Risk itself isn’t a bad thing. Yet, when it goes unmanaged, it can quickly become an issue for organizations. Risks can range from simple (but critical) assurances of certification to complex supply chain management issues that cause disruption. It helps to understand the plethora of terms used when speaking about the risk and resilience in your supply base. Here’s our guide:
Risk
| Supplier Risk Management | Supply Chain Risk Management | |
| Focus | Corporate level risks and corporate risk appetite (e.g. IT risks, people risks and finance risks) | Specific supply chain risks and supply chain risk appetite (e.g. Planning and forecasting) |
| Risk owners | Typically, the respective functional leads (e.g. Head of IT) | Typically, the respective product or category owners / finished good leads |
| Process and activity | Align to the end-end procurement process | Align to the end-end supply chain process |
| Risk mitigation | Aimed at the Tier 1 suppliers | Spans multiple supplier tiers (e.g. From Tier 1-Tier 4) |
| Risk controls | Most effectively determined via supplier segmentation (e.g. strategic suppliers vs transactional) | Most effectively determined via spend category or by finished goods |
Cash-to-cash cycle time is critical to a company’s operation as no capital can be generated if goods for sale are tied up in inventory. Cash-to-cash cycle time measures the time between the purchase of materials from a supplier and when payment is collected for sale of goods.
What is ‘risk appetite?’
Organizational risk appetite refers to determining the amount and type of risk an organization is willing to tolerate before taking action to reduce that risk. Defining your ‘risk appetite’ is about how much risk you are prepared to take to achieve objectives across your entire supply chain, and then calibrating this against the budget that you have, to build and embed the appropriate supply chain risk mitigation model.
What is the role of ‘supplier segmentation’?
Using the acceptance levels defined in your risk appetite, supplier segmentation assesses suppliers against criteria to evaluate, for example, financial stability, quality of goods or services, performance, and compliance. The desired outcome of this process is clarity on those suppliers that are low-risk, medium-risk, or high-risk across the supply chain and will enable the development of the appropriate risk management approach.
Considerations when building a supply chain risk profile
Financial Risks
Assess the potential for financial losses due to various factors affecting the flow of goods, services, and information between suppliers, manufacturers, and customers. These potential risks can arise from exchange rate fluctuations, supplier bankruptcy, commodity price volatility, or regulatory changes.
Information Risks
Consider the potential threats and vulnerabilities related to the handling, sharing, and security of information throughout the supply chain network. Key information risks include cybersecurity, information leakage, and misinformation.
Technology Risks
What is the potential for disruptions and losses due to issues related to the use and integration of technology? Key cyber risks include systems failure, software vulnerabilities, and integration issues with new technologies.
Customer Impact
What could be potential negative effects on customers due to disruptions or inefficiencies within the supply chain? These risks can lead to dissatisfaction, loss of trust, and, ultimately, a decline in customer loyalty. Key customer impact risks include product availability, quality issues, delivery delays, and price fluctuations.
People riskS
Map out the potential for disruptions and inefficiencies caused by human factors. Key people risks include labor shortages, training and skills gaps, and reputational damage.
Security risks
What potential threats and vulnerabilities can compromise the integrity, confidentiality, and availability of information and operations within the supply chain? Key security risks include cyber security threats and physical security threats, such as natural disasters or vandalism, fraud, and counterfeiting.
Supply Chain Resilience
Map out key supply chain resilience risks, including geopolitical instability, pandemics, and logistics and transportation issues.
Environmental Risks
Scope out potential negative environmental impacts and the associated challenges that can disrupt supply chain operations. Key environmental risks include climate change, raw material costs, and regulatory changes.
Social Risks
Take into account potential negative impacts on human rights, welfare, and community development due to supply chain activities. These risks can vary greatly between industries and suppliers and can significantly affect a company’s reputation and operational efficiency. Key social risks include forced labor, child labor, poor working conditions, and infringement on human rights.
Governance Risks
These are potential challenges and vulnerabilities related to the oversight, control, and management of supply chain activities. Key governance risks include regulatory non-compliance, lack of transparency, and inconsistent ethical standards.
Supply Chain
Supply chain tiers explained
Supplier tiering categorizes suppliers based on proximity and importance to the final product; understanding these tiers is critical for effective supply chain management and risk assessment:
Tier 1: direct business partner suppliers, provide essential products or services
Tier 2: secondary suppliers provide materials or services to Tier 1 suppliers
Tier 3: suppliers that are further removed and typically supply raw materials or services to Tier 2 suppliers
Tier 4: present in longer supply chains, again typically as raw material suppliers into Tier 3
What is ‘Supply Chain Resilience?’
‘Supply Chain Resilience’ refers to the ability of a supply chain to anticipate, prepare for, respond to, and recover from potential disruptions. It’s about maintaining the continuity of supply chain operations under unforeseen events such as natural disasters, political instability, economic downturns, or even pandemics.
A resilient supply chain has the flexibility to adapt and adjust to these disruptions, ensuring minimal impact on business performance and customer service. This involves strategies like diversifying suppliers, increasing inventory, investing in technology, and developing robust contingency plans. Ultimately, supply chain resilience is crucial for businesses to thrive in an increasingly uncertain and volatile global market.
What is ‘Supply Chain Transparency?’
‘Supply Chain Transparency’ is the extent to which all stakeholders (including manufacturers, suppliers, distributors, and consumers) have access to information about each stage of the supply chain. This includes details about sourcing, production, transportation, storage, and distribution. The benefits of supply chain transparency are manifold; it enables organizations to identify and mitigate risks, such as supplier failures or ethical issues.
Resilience
What is ‘Rightshoring’?
Rightshoring is the term that refers to the business strategy that involves placing a company’s components and processes in localities and countries that provide the best combination of cost and efficiency. It requires a business to analyze the complexity and importance of required tasks and entrust their completion with the most suitable workforce, regardless of location.
This could involve moving some operations to cheaper locations overseas or other cities or states while retaining core operations and processes at a local headquarters. The focus is on maximizing profits and lowering costs. Rightshoring is considered an evolution of offshoring, as it explores operations more thoroughly, both at home and overseas.
What is ‘Reshoring?’
Reshoring is the process of returning the production and manufacturing of goods back to the company’s original country. It is also known as onshoring, inshoring, or backshoring. Reshoring is the opposite of offshoring, which involves manufacturing goods overseas to reduce labor and manufacturing costs. Reshoring can be advantageous for industries such as technology, automotive, and textiles as it improves quality control, lowers transportation costs, and speeds up responsiveness to market demands.
What is ‘Onshoring?’
Onshoring is the process of sourcing or relocating a business’ production operations within domestic national borders.. Onshoring is often implemented to enhance responsiveness, reduce shipping times, and align with consumer preferences for locally produced items. Onshoring differs from reshoring. While onshoring refers to setting up production within national borders, reshoring applies to businesses that already have manufacturing operations overseas and are in the process of transferring production back to their domestic nation.
What is ‘Friendshoring?’
Friendshoring, refers to the practice of manufacturing and sourcing from countries that are considered geopolitical allies. This term is often used in the context of trade blocs. It involves rerouting supply chains to countries perceived as politically and economically safe or low-risk to avoid disruption to the flow of business. This practice has emerged out of recent economic crises and strains on global supply chains caused by various shocks to the global economy. Friendshoring can potentially lead to more expensive products if countries depart from areas with low production costs. time. There are also concerns about its impact on global free and fair trade.
What is ‘Nearshoring?’
Nearshoring is a business strategy that involves outsourcing tasks or services to a location that is geographically close, typically within the same region or continent. This approach is designed to capitalize on the benefits of proximity, such as similar time zones and cultural alignment, while still achieving cost savings compared to domestic operations. Key advantages of nearshoring include lower labor costs, language and communication barriers, cultural alignment, geographical proximity, and a similar time zone. It allows companies to tap into a global pool of highly skilled workers beyond the geographical footprint of their home country.
What is ‘Offshoring?’
Offshoring is a strategic business approach that involves relocating business operations, processes, or functions from one country to another, typically to a lower-cost location. This relocation can involve operational processes such as manufacturing or supporting processes such as accounting. The primary driving force behind offshoring is the pursuit of cost savings and enhanced efficiency. By moving operations to countries with lower labor costs, businesses can optimize their resources and remain competitive in a demanding marketplace.
Offshoring allows companies to tap into a global talent pool, harnessing specialized skills that may not be readily available in the companies’ home country. This can elevate a company’s product quality and innovation. However, offshoring also presents challenges, including communication barriers, intellectual property protection issues, and potential backlash from domestic labor markets.
What is ‘Dual Sourcing’, and what are the benefits?
Dual-sourcing is a supply chain risk management strategy that involves engaging two suppliers to provide a specific component, material, product, or service. Some benefits of dual-sourcing are:
- Fostering competition and innovation: By introducing a secondary supplier, healthy competition among suppliers is encouraged. This drives competitive pricing, improved quality, and innovative solutions.
- Addressing geopolitical challenges: Dual sourcing allows companies to diversify their sources, reducing vulnerability to geopolitical disruptions and ensuring uninterrupted operations.
- Building resilience: Creating adaptable supply networks enhances overall resilience, enabling companies to overcome various challenges.
- Fostering competition and innovation: By introducing a secondary supplier, healthy competition among suppliers is encouraged. This drives competitive pricing, improved quality, and innovative solutions.
However, dual sourcing also presents its own set of challenges, such as managing relationships with multiple suppliers and ensuring consistent quality across different sources.
What is a ‘buffer inventory’?
A buffer inventory is a concept in supply chain risk management that involves maintaining two separate inventories or buffers to manage supply chain disruptions and demand fluctuations.
The two buffers typically serve different purposes, they are:
- Supply buffer: This buffer is kept to mitigate supply chain disruptions. It allows the company to continue operations even when there are unexpected delays or issues in the supply chain.
- Demand buffer: This buffer is maintained to handle unexpected spikes in demand. It ensures that the company can meet customer needs even when there are sudden increases in demand.
The benefits of dual buffer inventory include reduced risk of ‘stockouts,’ improved customer service, and, in a manufacturing setting, helping maintain stable production lines. However, maintaining dual buffer inventory also has its challenges, such as higher holding costs, reduced cash flow, risk of obsolescence, storage constraints, and potential reduction in efficiency.
