While risks are a part and parcel of the industry, organisations nowadays have started understanding value of supply chain risk management (SCRM), says Vikas Khatri, Founder, Aviral Consulting.
Risk is part of every one’s life. As human being we plan our future and our plans always have component of unforeseen risks. Similarly, each business has associated risks and contingencies related to finance, demand & supply. Historically management pays maximum attention to financial risks, followed by demand risk and supply chain related risk gets least priority. While supply chain risks also have as much impact as other risks. Supply chain risks arise due to short supply, supply disruption, higher lead time, quality issues, natural disaster, statutory issues, transportation issues, port congestion, political issues, safety issues, cross-border regulation, economic instability etc. Consequences of supply side disruption are also having significant impact on P&L of organisation. As per a study, the organisation which faced major supply chain disruptions saw decline in sales, decline in operating income and decline in shareholder’s returns along with non-tangible losses post disruption.
Components of efficacy
Supply chain function has always focused on efficiency and cost reduction by introducing lean management, supplier rationalisation, JIT inventory, distribution channel optimisation and inventory rationalisation. All these tools have helped in achieving desired objectives but increased the risks. So, there is a trade-off between reward and risk of supply chain. In such scenario, the relevance of contingency planning in supply chain becomes very instrumental to minimise impact of any risk.
Over period of time organisations has started understanding value of supply chain risk management. Still the concept does not seem wide spread across industries. Large corporate and multinational organisations has included it as part of their processes. In case of medium and small size organisation supply chain risk management is still in nascent stage. Many of SME follow it as part of ISO or similar compliance processes, not as supply chain risk management process.
Even in case of the organisation who has implemented supply chain risk management, we find that more weight age remains only on upstream supply chain risk. We find that some of upstream risks are well documented like selection of vendor, supplier strategy etc, while some process the risk assessment tools used are not comprehensive and well documented. On the other hand downstream risks remains weak on prioritisation.
Next question which arises that why supply chain risk management is not in mature stage till date. Is SCRM too costly affair or is it too complex affair or something else. Supply chain risk management may be complex and costly, where organisation go for simulation modelling or optimisation of complex structure of multiple global suppliers, many manufacturing units and global clientele. But these costs also yield in long term rewards as well.
On the other hand, organisations may adopt for some simple models for supply chain risk management, which may have defined processes incorporated in the overall canvas of business. The beginning can be as follow:
Identification of Risk: For each process and sub process and external environment identification of risk factors is start point. Comprehensive identification of all possible risk factors of supply chain will lead to a better process of mitigation strategy.
Quantification of risks: Once possible risk factors are identified, next is to quantify the risk factors, in terms of magnitude and frequency.
Risk Mitigation Strategy: For identified risk factors risk mitigation plan and process improvement implementation mechanism should be developed. The mitigation plan must have specific guidelines and broad guidelines based on scenarios. The risk mitigation strategy must take consideration of cost benefit analysis also.
Documentation and Communication: Complete SCRM process must be documented with detailed processes and authorization matrix as part of risk policy document.
The document must be communicated to the respective stake holders and associated ones in supply chain, so impact of response can be initiated in minimal time frame and risk can be minimised.
Wherever the implementation is required to prevent risk, the document must state time frame and responsibility. SCRM not only help in elimination of potential , unexpected costs, reduced disruptions and time to recovery, but also support in supply chain performance improvement.
(The views expressed are solely of the author. The publication may or may not subscribe to the same.)