Supply chains are the backbone of many businesses in every industry. However, they can also be a risk and a source of vulnerability if you don’t choose the right suppliers to work with. Your company needs to identify and strategize how to mitigate these risks to optimize its operations.
In today’s post, we’re talking about supply chain risk management, which is assessing and preventing risks like disruptions or threats. With these tips, your company can enhance its resilience and prevent the potential impact of disruptions in your supply chain.
Examples of Supply Chain Risks
Supply chain risks include anything that can disrupt workflow, profit, or the credibility of your company. These risks can be:
- Political
- Environmental
- Ethical
- Cyber related
For example, a natural disaster can cause damage to your business, which puts a halt to the supply chain flow. Ethical issues include concerns about fair labor practices or where you source your raw materials. You may also be threatened by cybercriminals trying to steal your data or hold information for ransom.
Tips to Mitigate Risks in Your Operations
Whether you have a moving and storage company or you sell tires, supply chain disruptions can cause transportation delays, increased costs, and missed deadlines. Here are some tips to ensure these risks never happen to your business.
Conduct Basic Supply Chain Mapping
Supply chain mapping is the process of gathering important data about an organization’s supply chain processes. This information may include details about where the company gets its supplies and any individuals involved in the process.
The goal is to create a global map of the supply network. You must document the exact source of materials and track and document every distributor, seller, producer, and shipment.
If you create your supply chain mapping correctly, you can make more informed business decisions. You’ll also improve your risk management processes, so you’ll know exactly what to do if you’re faced with a particular threat.
Calculate Value at Risk
The Value at Risk (VaR) is a statistic that is calculated in risk management. The purpose of this calculation is to predict the greatest possible losses over a specific time frame. Additionally, the VaR is determined by three variables:
- Period
- Confidence level
- Size of the possible loss
Your company must identify the categories of risk, whether they're political, environmental, or ethical. You’ll then assign probabilities to the likelihood of the occurrence of each category.
Example for a VaR Calculation
In this scenario, we’ll calculate the risk of a potential oil spill in a coastal area:
- Time period: The first step is to determine the time period. Let’s say the time period has a 1-year time frame.
- Confidence level: You’ll then need to add your confidence level. For this example, we’ll say it’s 95%.
- Calculate the expected loss: Multiply the probability of an oil spill occurring by the potential volume of oil spilled, and then multiply that by the estimated cost of cleanup and damages. This will give you the expected loss in the event of an oil spill.
- Calculate the VaR: Using statistical methods, calculate the VaR by multiplying the expected loss by a factor that corresponds to the chosen confidence level. For a 95% confidence level, the factor is typically 1.645.
The last step is to interpret your results. The VaR calculation will give you an estimate of the potential loss associated with the environmental risk (in this case, the oil spill). For example, if the VaR is calculated at $10 million, it means that there is a 5% chance of incurring losses equal to or greater than $10 million within the specified time period.
Consider Weighted Ranking
Weighted ranking is a quantitative method that assigns scores to suppliers based on specific criteria. To do this, you can assign a score to each attribute that a supplier provides, such as quality, price, service, and delivery.
The next step is to multiply the score by the assigned weight of each factor. Then, total the weighted score so you can find out the final performance rating for each supplier. Use this weighted point system to rank suppliers.
Final Thoughts
No matter what type of business you have, there are ways that you can prevent risks from slowing down the flow of your supply chain processes. With the right strategies, you can even predict the probability of a risk occurring, so you can be prepared for whatever challenges you may face. Use the tips in this post to help you identify and mitigate risks in your operations.
