Supply chain risk management: Best practices & strategies

Over the last ten years, businesses in various sectors have faced significant challenges due to unexpected supply chain issues.

The COVID pandemic, the long-term effects of the Suez Canal blockage, port congestion in the U.S., and a global chip shortage affecting trade worldwide.

Meanwhile, cybersecurity breaches have left governments and private sectors scrambling, exposing critical vulnerabilities.

Why are these disruptions so widespread? The answer lies in the evolving complexity of global supply chains. 

This is where supply chain risk management (SCRM) enters the spotlight.

As part of this blog, we'll explore what it entails, why it's essential for SMBs, and what to do to safeguard your business against potential disruptions in your supply chain.

What is supply chain risk management?

Supply chain risk management (SCRM), or simply supply chain management, is all about spotting, assessing, and prioritizing risks in a company's supply chain.

It involves putting strategies in place to tackle these risks, making sure the business runs smoothly and stays profitable.

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SCRM not only shields a company from unexpected hiccups but also boosts the supply chain’s resilience and efficiency.

With global supply chains becoming more complex and interconnected, effective supply chain risk management is more important than ever.

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Companies with strong SCRM systems can handle challenges better, protect shareholder value, and seize opportunities even in unpredictable markets.

Part of managing these risks often includes using a supply chain assessment template (also known as a supply chain risk assessment template) to gain the full benefits.

Why is supply chain risk management important?

Imagine a supply chain as a rider on horseback carrying a package from one town to the next.

You can easily spot the risks: the horse could get hurt, rain might force the rider off the road, and so on. It's straightforward.

But now, let's add another horse. Then add trains, freighters, ports, and canals. Throw in dozens of regulations from different governments and a global weather system.

With all these additions, risks start to multiply and affect each other. In a dynamic system like this, risks interact in complex ways, making it hard to predict their overall impact.

Consider the Suez Canal as an example. When the canal was blocked by a large container ship, it caused a massive disruption.

This event wasn't just about one ship. It highlighted how a single blockage could delay hundreds of other ships, impacting global supply chains. 

Delays in one part of the world can ripple through the entire system, showing just how interconnected and vulnerable our global supply chains are.

Pillars of supply chain management

Here’s a quick overview of these pillars and the adoption curve for supply chain risk management:

1. Supply

This pillar covers areas like supplier continuity, strategic sourcing, financial stability, material pricing, assessments, and fraud prevention. 

2. Demand

Focuses on new customers, market trends, demand management, distribution, product integrity, service, and planning. 

3. Process

Involves IT systems, mergers, marketing strategies, organizational structures, governance frameworks, metrics, supply chain strategy, manufacturing quality, risk assessments, heat maps, and risk war rooms. 

4. Environmental landscape

Covers government regulations, taxes, economic volatility, currency exchange, natural disasters, and compliance. It has the lowest maturity and activity levels.

Each of these components represents a critical aspect of supply chain risk, and understanding them helps in developing robust strategies for managing and mitigating risks effectively.

These pillars can be strengthened with your supply chain network. Read more here about supply chain finance advice: Earning from your network.

Risks associated with supply chain management

It can be tough to fully prepare for every possible supply chain risk. Unfortunately, a supply chain is only as strong as its weakest link. To make it easier, many supply chain managers categorize risks into six specific groups:

1. Cyber risks

Suppliers using modern technology can face cyber attacks or issues from not meeting cybersecurity standards. These risks can harm both the supplier and the supply chain, indirectly affecting your business.

2. Financial risks

Market volatility, bankruptcy, and regional economic downturns can threaten a supplier’s financial stability. When suppliers cut costs, reduce routes, hike prices, or shut down, the businesses relying on them suffer.

3. Geopolitical risks

Changes in governments, wars, or unexpected tariff changes can disrupt supply chains. This might cause minor delivery delays or small cost increases, or it could lead to significant disruptions and loss of goods.

4. Man-made risks

Fires, explosions, and other risks from human actions can cause serious problems along the supply chain. Sometimes, suppliers don’t report these disruptions, so businesses must actively monitor for such events.

5. Natural risks

Natural disasters like earthquakes, hurricanes, and severe snowstorms can disrupt supply chains with little warning, causing global chaos.

6. Reputational risks

You’re often judged by the company you keep. This is true for supply chains, where the actions of suppliers can damage your business’s reputation.

Issues with corporate social responsibility and compliance are the most common concerns here.

Both buyers and suppliers encounter those challenges.

However, there are two more risks which they face during international trade. Read more here: Common risks for buyers and suppliers in cross-border trade.

6 steps for identifying and managing global supply chain risk

For decades, supply chains focused on cost efficiency and strong commercial outcomes.

But with new risks, you need new strategies.

Supply chain managers should take a multi-pronged approach to handle these stressors; relying solely on historical data isn't enough. A systematic plan that considers potential roadblocks and the unique needs of each business is crucial.

Here's a framework for a supply chain risk mitigation strategy:

1. Understand the risk threshold

COVID-19 taught us about the fragility of global supply chains.

Businesses must identify their risk thresholds to prepare for future disruptions.

Consider questions like:

• If a pandemic continues, can you source all parts?
• If a natural disaster strikes, can you still deliver products efficiently?
• If a warehouse is destroyed, can another location take over?

A solid risk threshold involves contingency plans for the most likely and impactful scenarios, considering costs, supply chains, and reliability.

2. Define boundary conditions

Opportunities are endless in supply chain management, but not all are feasible.

Managers should define what’s possible and what’s not.

For instance, while smaller facilities might seem ideal post-COVID, optimized mega-factories offer significant advantages. Defining boundary conditions helps create a cohesive plan for diverse scenarios.

3. Identify critical partners: supplier assurance

Who will step up when disaster strikes?

Identifying and involving key partners across the supply chain is crucial. This includes regional suppliers and logistics partners.

Flexibility and portability are key; ensure you have multiple sources and designs that allow component swaps if needed. 

Strong supplier relationships built on assurance and tested contingencies are vital. Learn  how to boost yours..

4. Manage trade-offs

Deciding where to place business operations involves trade-offs.

Moving operations after decades of investment is complex and costly.

Identifying acceptable trade-offs while maintaining quality is easier when you’ve already defined risk thresholds and boundary conditions.

5. Agree on funding model

Changes from the status quo can be expensive.

After identifying critical partners and processes, agree on financial terms.

Outline credit terms, line of credit, payment schedules, and ownership arrangements to ensure smooth activation of contingency plans.

Following these strategies, businesses can map out plans similar to "Choose Your Own Adventure" books.

If one event occurs, take one action; if another event strikes, take a different action. These pre-planned strategies minimize supply chain disruptions.

By adopting a systematic approach to managing new supply chain risks, businesses can build resilience and ensure operational continuity, even in the face of unforeseen challenges.

What are the best practices for managing supply chain risk?

Preparing for supply chain risks and challenges requires a solid risk management framework. Here are some key strategies to help you build one:

1. Source multiple suppliers

The pandemic exposed gaps in supply chains. Shifting to multi-source modeling can help, where you have backup vendors if one fails. Look for suppliers with multiple locations to avoid a single point of failure. Good relationships and clear metrics ensure you meet demand on time.

2. Find closer sources

Weather and natural disasters can disrupt supply chains.

To manage these risks, find suppliers and distributors close to your operations. This reduces delays and costs related to long-distance shipping.

For instance, Stanley Black & Decker opened new factories in Mexico and Texas to mitigate such risks.

A mix of nearshore and offshore suppliers can offer a balanced approach.

3. Maintain inventory buffers

While just-in-time (JIT) supply chains cut costs, having a "just in case" inventory can prevent disruptions during unexpected events.

Historical supply chain metrics can guide you in maintaining the right inventory levels.

4. Leverage financial tools for flexibility

Utilize receivable financing and supply chain financing to enhance financial stability.

These tools provide immediate cashflow from outstanding invoices, allowing you to manage payment delays without straining your resources.

This approach ensures you maintain operational effectiveness even during times of supply chain uncertainty.

Read more about it: How receivables finance (RF) can aid supply chains.

5. Improve vendor visibility

Understanding your entire supply chain helps identify potential issues early. Ensure visibility into third-party vendors, including their financial health and dependencies.

Use technology for product and shipment tracking and conduct regular supply chain risk assessments before finalizing contracts.

6. Model worst-case scenarios

Use data modeling and predictive analytics to simulate high-risk events and their impacts.

Develop contingency plans and conduct tabletop exercises (TTX) to prepare your team for real-time responses to disasters.

7. Find software solutions

Management software can enhance visibility across your supply chain. Cloud-based solutions reduce inefficiencies and improve flexibility during disruptions.

These tools provide insights for efficiency improvements and cost savings.

8. Perform regular risk assessments

Regular risk assessments are crucial. They help identify, analyze, mitigate, and monitor risks.

Update your risk register and develop action plans accordingly. Consider third-party audits every few years for an unbiased perspective.

Strengthen your supply chain with invoice financing

Supply chain risk management is a complex activity that involves thorough due diligence, supplier evaluations, SCRM risk assessments, and managing vendor relationships.

It also requires coordinating with company stakeholders and ensuring that risk mitigation activities are carried out effectively, adding to its challenges.

However, by adopting smart strategies like having backup suppliers, liquid finance, and the latest tech, you can shield your business from these bumps in the road.

For small and medium businesses, maintaining a steady cashflow during these ups and downs is key. This is where we step in with our flexible invoice financing and revenue-based financing options. 

These solutions help smooth out cashflow bumps, allowing you to focus on growing your business without worrying about supply chain snags.

Curious to see how Stenn can help your business stay resilient and ready to face any challenge? Let’s chat and get you set up for success!