Supply Chain Risk Management
Supply Chain Risk Management is the concept of trying to foresee disruptions to timely supply of goods or services required by the organisation and creating systems to mitigate these at the lowest possible cost to the organisation and by so doing ensure that there will be continuity in the normal operations of the business.Supply chain risks have the potential to cripple a business’ operations and can have long and short term effects which may be difficult to recover from.
A delay along a route is a short term problem whereas the presence of a monopoly supplier in the chain holding up stocks to force an increase in prices or shutting down for whatever reason is long term.Certain types of disruptions are both difficult to anticipate and rare, but very damaging when they occur; for example, natural disasters such as earthquakes are difficult to predict but have the potential to ruin entire factories and road networks wreaking havoc to the entire supply chain.
Disruptions to supply can be anticipated and countered by building inventory or by having multiple redundant suppliers since it is highly unlikely to encounter a scenario where multiple suppliers are simultaneously disrupted.
Both of these processes can be described as building supply chain reserves. Concept of Risk Risk can be perceived from various angles; one of its basic definitions being the probability of threat of quantifiable damage, injury, liability, loss or any other negative occurrence that is caused by external or internal vulnerabilities and that may be avoided through pre-emptive action.
In developing an understanding of risk, it is necessary to incorporate its two fundamental facets; the first being the exposure to the uncertainty and the second being the actual outcomes upon occurrence of the event. 2 Hence, risk can be expressed as the product of probability and consequences of an event. Along with this, one must also be able to know the sources of the identified risk. 2 It is common to analyse risk by means of a matrix with 2 dimensions, probability and consequences but such an analysis has the main disadvantage of being reliant on risk perception.
Risk perception depends on time, experience, location, attitude, position and possibilities to decide and scale of events. 2 It is also important to realise that risk has no technical value in and of itself, hence in developing a risk management process, the aim is to always do it at a minimum cost. 3 Risk Variety An overview of business risks in general is useful in understanding supply chain risk. Risks can be externally driven (environmental, external factors, competitors, customers, regulations), internally driven and decision driven.
At times, managing supply chain risk may be difficult because of the interconnection of individual risks and actions that mitigate one risk may end up exacerbating another. For example, nitrogen gas used for bottling in large amounts may displace the local atmosphere and cause asphyxiation. Increasing local stores may minimise the effects of a shortage of supply but immediately it increases storage costs and the possibility of leaks in a larger vessel.
Broadly speaking, risks can be categorized as those that bring about delays in the supply chain and those that disrupt the normal flow. 4 Delays The occurrence of delays in material flows is the result of either of several possible factors such as; Inflexibility of suppliers hence inability to respond to changes in demand Poor output at supplier plants High levels of handling or inspections at border crossings In a scenario where these are frequent, historical trends can be used to create a forecasting tool against which with proper demand planning, these effects can be mitigated.
In the local case of SZL, sugar is may be delayed by a day or two at the Limpopo Border post and analysis of past trends has allowed a conclusion to be drawn that a minimum and maximum stock level of 3 days and 1 week cover is sufficient to both cover for these drawbacks and at the same time neither be too much of an impedance to the cash flow of the organisation nor create a significant rise in local storage costs. Disruptions Disruptions by nature tend to be infrequent, difficult to predict and forecast but very damaging when they occur.
Examples that fall under this category include labour strikes, terror strikes and fires. Some disruptions have effects that transcend over various industries and can even be international such as earthquakes or the tsunami in Japan in recent memory. Disruptions also adversely affect material prices which can pose a significant problem to business operations. These can be countered by building inventories or having multiple redundant suppliers. The decision making process however as to which path of action is governed by the following factors; Cost of inventory
Cost of keeping inventory Accuracy of prediction of the disruption and available information Rate of obsolescence of material whilst in inventory Likelihood of disruption For instance, MM juice concentrates are a high cost in storage, requiring refrigeration to maximise on lifespan but the decision is made to keep a significant amount within stock because of the uncertainty of the supply delivery time and the reality that upon the sea, there may be unforeseen disruptions.
However, in the case of bottle preforms, not more than a week’s cover is normally kept because of the usual reliability of the suppliers and low likelihood of low supply. A recent incident however has necessitated to review this as an intra-factory incident at Megapak caused a mini-crisis within the organisation. Risk Handling Often, the strategies employed by companies protect against recurrent relatively low impact risks in the supply chain but tend to ignore high impact low likelihood risks.
Suppliers with quality problems represent a common recurrent problem (labels with SZL for instance). Top manufacturers will deal with the range of supply chain risks encountered by holding reserves in the form of excess inventory, excess capacity and redundant suppliers. 4 The key challenge facing management is to intelligently position and sizing of supply-chain reserves with a minimum impact on profits i. e. attain the greatest possible profit regardless of the level of supply chain risk and achieving this in an efficient manner.
To development a risk management strategy that will work, it is necessary to first create a shared organization-wide understanding of supply-chain risk and then determine how to adapt general risk-mitigation approaches to local organizational circumstances. 4 This is achieved by stress testing and tailoring. Stress Testing This is a team exercise that aids managers and their organizations to both understand and prioritize supply-chain risk. A what-if scenario analysis can be employed to assist the key players to focus on the supply chain 1-link at a time.
It is a brainstorming exercise that helps the company prepare for unforeseen events rather than the platform to debate the likelihood of such events. Such an exercise allows for risk-mitigation priorities to be made for the near, medium and long term. In addition to this, it leaves all involved parties with a clear idea of what risks might have an impact on sales, procurement costs, revenues, prices and possibly even reputation. 4 Tailoring Tailoring is the process of suiting the response to a risk to the organization and continuously monitoring to ensure that procedures and systems in place are suitable for the purposes of the business.