Three Fundamental Truths About Supply Chain Risk

Editor’s Note: Omer Abdullah, Co-Founder and Managing Director of The Smart Cube

Conditions may be shifting, but the fundamentals of supply chain risk management aren’t. Here are three facts that aren’t going to change post-pandemic.

In the wake of the COVID-19 pandemic, supply chain risk management has shot back to the top of many organizations’ agendas. Rocked by the disruption of 2020, organizations are re-evaluating how they look at and approach risk in the supply chain, and changing strategies to help them become more resilient against the next big unforeseen crisis event.

For many of those organizations, their efforts will involve deep-dive assessments of their categories, supplier portfolios, and processes to surface potential issues, and better understand risk exposure and vulnerabilities across the supply chain.

That’s a great starting point. But at times like this, when big decisions are being made that will impact how risk is managed for years to come, it’s also important to zoom out and remind ourselves of the fundamentals of risk management.

Here are three fundamental truths about supply chain risk that influence every decision you and your team make. They haven’t changed during the pandemic, and they aren’t set to change any time soon – so it’s well worth understanding the best ways to live with them, and navigate around them.

1.) No decision is risk free

Risk is one of very few true constants in business. No matter how small, it plays a role in every choice we make. So, when you’re making supplier, logistics or any other kind of supply chain decision, searching for risk-free options is a fruitless endeavour.
Take a routine procurement decision for example. A new supplier pops up, offering the same kind of product as your current supplier, delivered from the same region, through the same logistics partner, just at a slightly reduced cost. From a procurement perspective, that’s a slam dunk – a clear win that shouldn’t expose you to any additional risk.

But even then, there are risks involved. This new supplier is an unknown – you have no history with them, and don’t know much about their ability to deliver, or what they’re like to work with. To work with them you need to take a leap of faith, and that’s a risk – no matter how strong they appear on paper.
The key point here is that change and risk are inextricably linked to one another. Any change, no matter how small, represents new risk – even if it reduces overall supply chain risk exposure.

That’s something you simply can’t fight against. Instead, procurement and supply chain teams must learn to live with risk. Rather than seeking risk-free paths, they need to reduce it and mitigate against its potential impacts as much as possible.

2.) Expanding your reach means increasing exposure to risk

Recent events like the COVID-19 pandemic have brought unprecedented disruption to global supply chains. But that’s not just because the events themselves are unprecedented.

For decades, we’ve been building increasingly complex global supply networks, designed to help us source and move goods at the right time, and the right price. Those supply chains contain a huge number of touchpoints, and for large companies, usually involve partners and suppliers from every corner of the globe.

With a global supply chain comes global risk. When a crisis event happens today, it has far-reaching impacts on businesses right across the globe. What previously may have been an isolated national emergency can quickly spiral into a global supply crisis.

Take the start of the COVID-19 pandemic for example. In the beginning, cases were mostly limited to China, but as soon as China began taking measures to limit its spread, businesses everywhere began feeling the impact. Factories closed, and supply was halted, preventing global businesses from operating as usual long before COVID cases reached significant numbers in their own country.

But that isn’t a warning against building and operating global supply chains. The global supply chain – while complex – is a hugely important asset to modern businesses. It enables production at the cost and speed demanded today, so avoiding them isn’t an option. Instead, the best path forward is to simply be aware of the global risk you’re exposed to.

If decisions can be made to limit risk exposure while still maintaining all of the benefits of a global supply chain, then it’s probably a good idea to do so.

3.) Risk is constant – so risk management must be too

As mentioned previously, risk is constant in all aspects of modern business. It’s constantly evolving, and plays a role in every decision made at every level. So, it must be constantly managed and monitored too.

After any major crisis event, teams will naturally want to dive into supply chain data, and conduct deep assessments to understand how they can better manage and mitigate risk. That’s a worthwhile activity, but risk management can’t just be based on snapshot assessments.

To mitigate risk and ensure your business is better prepared for the next supply chain crisis, risk management needs to be part of your culture – something that’s considered as every decision is made, not just looked at reflectively every few months.

The risk landscape is constantly shifting, and only by weaving risk management into your day to day operations and decision-making processes can you hope to control and contain it.

With risk, knowing is half the battle

Managing and mitigating supply risk is fundamentally about having relevant and timely insights into the key factors that could disrupt your supply chain – and then acting on the information, either proactively or reactively.

Once you understand that every decision you make involves some level of risk, and have visibility of that risk and its potential impacts on operations, you’re most of the way towards having a robust risk management strategy.

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