At its most fundamental level, supply chain management (SCM) is about managing the flow of goods, data and finance associated with a product or service, from purchasing raw materials to delivering the product to its final destination.
While many people equate the supply chain with logistics, logistics is actually just one component of the supply chain. Modern digitally controlled SCM systems include material handling and software for all parties involved in product or service creation, order fulfillment, and information tracking, such as suppliers, manufacturers, wholesalers, transport and logistics providers, and retailers.
Supply chain operations cover aspects such as procurement, product lifecycle management, supply chain planning (including inventory planning and maintenance of enterprise assets and production lines), logistics (including transportation and fleet management), and order management. SCM can also extend to global trade-related activities such as global supplier management and multinational manufacturing processes.
Consequences to be expected while neglecting supply chain risks include reduced margins, surges in demand, production and supply disruptions, quality problems, and social problems.
Impact of the Covid-19 pandemic on supply chains
The Covid-19 pandemic, which, while continuing to keep all sectors of the economy on hold, has helped uncover many vulnerabilities in organizations of all types around the world. It has forced many industries to rethink and transform their supply chain models. A small percentage of firms have implemented a supply chain risk management plan in the past few years. But it was during the pandemic that the number of companies that did it skyrocketed.
Why is this so important in the current environment? The global market is more volatile and competitive than ever, and the demand for products is only growing and margins, on the other hand, continue to shrink. A supply chain risk management plan is a strategy for accelerating response to as many contingencies as it is for minimizing supply chain disruptions. It’s about natural disasters, theft, supplier delays, production disruptions, and even cybersecurity. While these risks may be common and more frequent, other risks may appear less visible but just as devastating. These include, for example, changing market conditions, gaining market share by competitors, operating at a lower cost, or even changing customer tastes.
Supply chain risks
Among the supply chain risks, Deloitte highlights:
- macro-environment risks that affect the entire supply chain: economic crises, restrictions on the availability of raw materials, political instability, new legislative requirements, natural disasters;
- functional risks – risks of “related” business processes, organization and infrastructure: risks of incorrect legal, tax support, personnel selection risks, IT support risks.
Risks of the macro environment also include risks of an extended supply chain – the risks of the supply chain of suppliers and customers: risks in planning, procurement, production, launching a new product, deliveries; as well as operational risks in its own supply chain: risks of suppliers and their contractors, risks of companies providing outsourcing services, risks of consumers.
The key challenges in managing supply chain risk are:
- lack of well-built cross-functional communication;
- high cost of implementing risk management strategies;
- lack of risk information needed to justify the investment;
- lack of transparency in the supply chain;
- unwillingness to assess the benefits of implementing risk management strategies;
- lack of a risk management / ownership system;
- lack of a KPI (Key Performance Indicator) system that stimulates risk management;
- lack of support from top management of the company;
- lack of definition of supply chain risks in the company.
Supply chain risks can be minimized by:
1. An adaptive supply chain (a production and logistics network in which many enterprises (manufacturers, warehouses, distributors, 3PL and 4PL providers, forwarders, wholesalers and retailers) interact and use all modern methods and technologies to make the supply chain flexible, sustainable efficient and competitive in order to improve the level of service, minimize costs and increase business profitability).
2. Contingency plans.
3. Development of a multipurpose workforce (multipurpose employees are effective during a changing business environment and are able to ensure the growth of the company). Development of the ability to quickly influence changes in demand.
4. Flexible rescheduling of commodity flows (sales are directly dependent on demand, which now fluctuates significantly, so suppliers need to respond quickly to these changes. In such conditions, companies, especially suppliers of perishable goods, automate the planning process and carry out rescheduling every day to prevent out of stock and overstock).
5. Increasing the ability to maintain brand reputation.
6. Development of SRM and CRM processes (customer relationship management systems are becoming more and more relevant).
7. Participate in lobbying activities to establish the right connections and influence profitable formal decisions.
8. Hedging (taking measures aimed at insuring risks in financial markets).
The Role of Technology in Supply Chain Risk Management
The transformation of traditional supply chains into flexible digital supply chains is forcing merchants to change their approach to managing cost and creating value for end users. Digitalization of processes in supply chains makes it possible to automate, and accordingly speed up and simplify them. This is where supplier relationship management is one of the critical success factors for this transformation.
Modern technologies provide the ability to continuously extract large amounts of data from multiple sources in real time, as well as visualize it so that companies understand the likelihood of these risks at each stage of the journey and their severity.
For example, what are the risks for each shipment from the moment the goods are packed in trucks, railroad cars, airplanes or ships until they arrive at their final destination? How likely are these risks and what will be their consequences? And how will we react in each case?
According to research by Deloitte, among the supply chain risk management technologies that are widely used by many companies are the following:
- Financial risk modeling (45%)
- Supply chain operational planning (44%)
- Risk management tools (42%)
- Supply chain strategic planning (42%)
- Predictive modeling (36%)
- Risk forecasting (35%)
- Scenario Modeling (32%)
- Simulation of processes (29%)
Leaders in SCM successfully apply complex technologies and optimization techniques: JIT, Lean 6 Sigma, outsourcing, integration of suppliers and customers in the “extended supply chain”, multichannel retail supply chains and much more.
With the right data at the right time, people are able to make the right decisions. Regardless of the type of supply chain, risks can be avoided or at least minimized. Companies not only have the ability to cut costs in the long run, but they can also ensure timely delivery to meet customer needs.