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The Global Language of Business

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The Global Language of Business

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What Is Supply Chain Risk Management?

  • When moving products through the supply chain, there’s always the chance of an occasional problem. These can range from minor to major problems, including one- or two-day delays and roadblocks, leading to a change in business operations. Over the last decade, the world has seen significant supply chain disruptions affecting everyday life.

    The supply chain risk management framework aims to put contingencies in place for global pandemics, tariffs, natural disasters, and other outside factors. These disruptions can interrupt the flow of products from manufacturers to distributors, to retailers, and, finally, to customers.

    Why Is It important?

    Disruptions to the flow of products at any point in the supply chain will have an impact on how you serve your customers. Most importantly, as a company, when you are unable to plan accordingly for potential risks, you will likely miss financial goals and/or even lose customers to competitors when products are unavailable.

    Whether it’s a shortage of raw materials, components, or a finished product, your fulfillment time changes anytime there’s a disruption upstream in the supply chain. Knowing what risks can potentially affect the supply chain is essential.

Long-exposure picture of inventory being moved through a warehouse

Types of Risk

Before you can start implementing supply chain risk management strategies, you need to understand what types of risk you’re going to face. The most common types of risk include:

  • Supply and demand risk
  • Process risk
  • Environmental risk

Your supply chain risk management processes will need to address these areas. However, keep in mind that industries will also have unique risks attached to them. Be sure to address these, as they impact your business as well.

Supply Risk

A shortage of raw materials or other snags in production will cause shortages in your supply. The effects of supply shortages often come in steps. Suppliers will often have to ration product distribution, limiting inventory fulfillment. As supply gets shorter, prices will go up if demand stays the same.

During the COVID-19 pandemic, entire factories were shut down or operating on a reduced workforce for weeks and months at a time. Everyday items like toilet paper and common foodstuff became scarce. To mitigate the supply chain problems, retailers sourced products from several partners to gather as much inventory as possible, trying to keep prices down and better serve their customers’ needs.

Graphic of a boxed product with a warning symbol

Demand Risk

Demand for your product depends entirely on customer behavior. Recall the countless fads that we see in pop culture, Beanie Babies, the Pet Rock, fidget spinners, and even specialty foods. We know that investing in a single product creates issues when the demand inevitably shifts. Investing in other products and offerings helps to mitigate risk of demand loss and ultimately profit loss.

Graphic of a toy teddy bear overlaid with a warning symbol

Process Risk

Process risks are very common for most businesses. They often stem from inefficient practices, and they are common in design, manufacturing, and even the management and training of staff. Think of the common saying “measure twice, cut once.” People should measure twice to avoid waste in the process and what could be costly mistakes.

Many manufacturers know how much of their materials will go to waste or need to be recycled after production; they also account for incoming and outgoing money with receivables and payables. GS1 Digital link can assist in increasing sustainability. However, there are always unknowns like cyber attacks and widespread supply chain disruptions.

Lean manufacturing techniques like those used famously by Toyota have helped to avoid forms of process risk. Adopting Agile management techniques is another common way of avoiding process risk. Advances in technology, such as the use of CAD and 3D printing prototypes, are also helping to remove some risk in design. Techniques like those listed above allow manufacturers to quickly identify potential flaws before moving to production.

Graphic of a warning sumbol inside of a revolving gear

Environmental Risk

Environmental risk concerns both internal and external environments. Internal risks, which we have lightly touched on, include situations relating to inside a company or its products. Common examples of internal risk include the transfer of skills among employees who are retiring or not having enough staff or capacity to meet goals. When we relate this to supply chains, this could include not having enough drivers or trucks to meet the demands of deliveries.

External environmental risks often concern events like pandemics, natural disasters, floods, hurricanes, and even blizzards that would disrupt deliveries of completed products and even raw materials moving through the supply chain. The occurrence and severity of natural disasters can be unpredictable. Despite the unpredictability of many environmental risks, having contingencies in place increases readiness.

Planning for tariffs, which is another external risk, might have you looking for domestic fulfillment options or pivoting to global partners in countries that haven’t been hit quite as hard with tariffs. Understanding weather patterns in your area or in places where you have warehouses can minimize the impact of tornadoes or hurricanes. When it comes to political conflicts, diversifying fulfillment allows you to turn to other suppliers should your first option be limited.

Graphic of warning symbols and alerts popping up around the globe
person working in supplier warehouse

Strategies to Mitigate Risk

Whether you’re proactive or reactionary to risks, you need to know how to operate when shortages or other disruptions occur. Some of the supply chain risk mitigation strategies you can employ are:

Let’s look at each to see how to mitigate risk in your supply chain.

Multi-Sourcing

One of the biggest lessons over recent years is the need to use multiple partners and suppliers. This method ensures that even if one partner has an issue, a company can still operate.

Multi-sourcing has several approaches, including creating a network of multiple suppliers for materials. If a primary supplier loses access to a product or materials, another partner can provide material or product allocations. It can also include using multiple distribution partners to fulfill customer orders. This approach reduces issues during production and in fulfillment with the end customer.

If you prefer to work with a single supplier, ask about distribution from multiple locations. Many distributors offer fulfillment from several warehouses to make it easier to carry a larger inventory and serve regional partners.

Graphic of a person symbol inside a circle connected to eight other circles

Demand Forecasting

Demand forecasting is the straightforward process of analyzing data and trends to ensure proper inventory and supplies are available. The goal of demand forecasting is to ensure that inventory is available to meet the demands of consumers. Without demand forecasting, the chance to introduce waste increases. The goal is to properly meet the demands of consumers.

Let’s look at some examples. As the holiday season approaches, data shows that some customers start shopping for toys in September. The goal of someone in the supply chain would be to ensure that products are on the shelf from September through December to meet all demands. At the end of the holiday season,the goal is to have an inventory that is not in excess of post-holiday season demand while also not selling out prematurely.

When demand forecasting is not carried out correctly, stores, factories, wholesalers, and distributors will have excess inventory that is no longer in demand. When products are no longer in demand, they go through liquidation or deep discounts. Discounts lead to lower margins and profits for some in the supply chain. On the other side of things, when companies are unable to meet demands, they lose potential revenue and business to competitors.

Demand forecasting loves data, which means the larger the sample sizes that you have, the more accurate your predictions will be. Your forecasting experts can make predictions for inventory and staffing needs year after year or even years in advance. Creating demand forecasts is a great way to ensure you’re managing production and inventory, minimizing costs, and managing internal quality data.

Graphic of a magnifying glass over one data point in a plot

Inventory Management

The holiday season toy demand is a great example of the need to control inventory. No matter how large or small your business is, effective inventory control is key to managing operating costs. Creating an inventory buffer is an effective method for mitigating short-term supply chain disruptions and demand fluctuations.

Maintaining an inventory buffer can be costly, with the upfront costs of building an inventory and the risk of unsold products sitting in the warehouse. However, a buffer is still beneficial, as a company will be better positioned to maintain product flow as supply runs out upstream in the supply chain. Having a product buffer is also an effective way to handle warranty claims without affecting current inventory levels.

Knowing which inventory items should be stocked in excess can keep costs associated with an inventory buffer from being exorbitant. By creating a buffer, you’re focusing primarily on essential inventory items that your customers need. For instance, a pharmacy might carry a buffer stock of common medications to temporarily mitigate material shortages with manufacturers. Pharmacists can continue to work without worrying about the inability to fill patients’ prescriptions.

Graphic of a magnifying glass over a checklist document

Frontloading Your Supply Chain

Frontloading is becoming a much more common term these days in the supply chain world with tariffs headlining the news. Frontloading is a common practice in preparation for foreseeable interruptions in the supply chain.

Frontloading, or stockpiling, is common in U.S. states often affected by hurricanes. Governments will have reserves of first aid supplies and equipment on hand for likely scenarios and will often have reserves of gas and oil for any shortages. Today, companies have strategically used frontloading to help alleviate higher costs of doing business because of imposed tariffs.

While expensive, some companies have increased production and importation of products at a faster rate to avoid tariffs temporarily. In this case, frontloading helps to temporarily avoid the expected increased cost of the production of goods while governments negotiate trade agreements. Stockpiles are a general excess of inventory, which will mitigate widespread and general supply issues.

Graphic of a pallet of products with a bar code overlaid over them

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GS1 US Can Help

You can learn more about supply chain risk management and mitigation strategies by requesting more information from our team of experts. GS1 US® can help you implement GS1 Standards to improve data quality and sharing across your supply chain, making it easier to track your inventory from end to end. We can put you in touch with other professionals within your industry and workgroups that can help create global supply chain risk management strategies.

At GS1 US, it’s our mission to help your business improve your data with streamlined processes and comprehensive sharing capabilities. We’re proud to offer GS1® members access to industry initiatives that will improve risk management in your supply chain.

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