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How supply chain management affects a company’s risk management strategy

Via Logistics & Materials Handling : External volatilities and natural disasters such as hurricanes, extreme weather, and political unrest can cause significant disruption to businesses, often with devastating impact.

Consider environmental change as a factor: natural disasters have already caused major economic losses in vulnerable, developing regions such as Southeast Asia and Sub-Saharan Africa, and we estimate that by 2030 the annual global economic cost of natural disasters could be as much as AUD$479 billion.*

Terrorism, conflict, and political instability are other potential causes of supply chain disruption. The character of conflict is changing and is often unexpected, resulting in increased disruption. According to the DHL Resilience360 risk management platform, civil unrest is a major risk in more than 30 percent of all countries, while the number of incidents related to terrorism have increased by 59 percent (even outside the Middle East) compared to the first half of 2015.

Incidences of digital risk are also on the rise. While the world benefits from technological innovation and advancements, the by-product of this progress is cyber risk, which can come in the form of data breaches and hacker attacks.

So what role does the supply chain play in helping to manage these risks? Research from the World Economic Forum reveals that large disruption to the supply chain is likely to impact a company’s share price by 7 percent on average. Not only are there explicit financial losses caused as a direct result of supply chain disruption, but supply chain disruption also affects a company’s reputation, as confidence in the business is likely to decrease. There are a number of functions that must play a role in the development of a company’s risk management strategy, from enterprise risk management to cyber risk management. However, the supportive backbone in an overall risk management strategy will always be an effective, resilient and well-managed supply chain.

Getting ready to face disruption

For many large-scale engineering and manufacturing businesses, the supply chain plays a central role throughout operations. It must be protected, and each company should also prepare for the external factors that could negatively impact the supply chain. The current design paradigm of a longer, leaner supply chain could prove to be a burden in the future. Therefore, from the planning stage of any project, it is important to assess risks and prepare for them by implementing contingency plans. Equally important is the insistence that suppliers have appropriate contingency plans in place. Increasing supply chain visibility is a core element of this – visibility makes it easier to understand where products are, how shipments could be disrupted, and what must be done to mitigate for this.

Understanding and predicting supply chain risks

Supply chain risk management works best when companies have the earliest possible notice of potentially disruptive incidents. Data analysis is a key element. By analysing past data, E&M businesses can develop a better understanding of what risks they might face at any given time, and ensure they are protected in the future. Communication across business functions means that data can be centralised and analysed most effectively, helping companies to predict risk. Collaboration across business functions should always be encouraged. E&M companies should run simulations on their supply chain processes as well so they can identify pressure points and predict how these might have an impact in future.

Managing a crisis

Despite a company’s best efforts, sometimes it is inevitable that disruption will impact the supply chain. What is important now is that businesses put their planning into action. Employees need to react quickly but carefully, and the business must communicate clearly both internally and externally with its partners. If the business has prepared well and used robust data to predict the potential of risks in the supply chain, overall impact on operations will likely be reduced.

Ultimately, businesses will never completely avoid disruption but if they prepare they can potentially reap rewards. Companies that get supply chain risk management right have a strong foundation on which to develop their overall risk management strategy. With it, they can often gain advantage by filling the gaps left by their less-agile competitors. By investing in more resilient supply chains, E&M businesses will not only reduce the impact of disruptive events, they will also have the potential to boost overall business performance.

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