The Alternative to Multiplication for External Risk Management in Supply Chains

Few and far between are the organisations that are a complete supply chain in themselves. They are much more likely to be part of an overall supply chain with upstream components, downstream components or both. Whether you make cars, computers or breakfast cereals, the same logic applies. You have suppliers upstream from which you acquire raw materials. You have distributors and retailers downstream upon whom you depend for the sale and consumption of your products. That means extra, less controllable (for you) links in the chain that could break and bring your business to a standstill, even though your own organisation is working perfectly.

Managing risks in other parts of the supply chain means first understanding what those risks are. They can be described as follows:

  • Demand risk. Unmanaged variation in the demand for your organisation’s output.
  • Supply risk. Unavailability of input raw materials or sub-assemblies (e.g. shortage of rare earth minerals for IT products, or crop failures affecting cereal production).
  • Business risk. Financial or management change in your suppliers or your resellers, that means they stop supplying or selling for you.
  • Physical risk. The state of physical assets or regulatory compliance of your supplier or reseller prevents them from functioning for you.
  • Environmental risk. Any or all of different economic, social, climatic or governmental factors that affect your business or the business of key suppliers and resellers.

 

Managing your own risk can be a challenge. Trying to manage a supplier’s or reseller’s risk can be far too ambitious. For many businesses, the answer is to recruit additional suppliers and resellers, and to diversify into other markets. This helps to spread and reduce the supply chain risk, although it usually leads to increased complexity. The alternative is to select upstream and downstream partners according to their own business continuity planning. Business continuity standards are a key tool here for comparison, because they allow you to compare like with like. Thus you can keep complexity and extra effort down by a raise in the resilience of each of a small number of supply chain partners.

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