Predict and mitigate business disruptions by prioritizing, continuously assessing, and governing supply chain risk.
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Supply Chain Risk Management: Key Strategies for Success
No one can control risks, but you can control their impact on your supply chain
Top supply chain organizations experience less than one-third of the supply chain disruptions of their peers.
How? By shaping which supply chain risks will disrupt them and reducing the number of disruptions they experience.
Download Gartner’s guide to the new supply chain strategy that successfully minimizes risk impact:
- Discover two steps to reduce your rate of supply chain disruption.
- Sense and respond faster to supply chain risks.
- Get the business case builder for supply chain risk management.
Increase supply chain risk readiness to combat market disruption
Enhance your risk management maturity by continuously reviewing governance processes and introducing technology solutions to optimize business performance and achieve stakeholder expectations.
- Risk Mitigation
- SCRM Technology
- SCRM Best Practices
Identify and assess supply chain risks to improve your response strategies
Supply chain teams must constantly address risk, whether generated internally (e.g., workforce dynamics, business model shifts) or externally (e.g., macroeconomic disruption, environment and climate dynamics). Supply chain disruptions can put business performance at risk, cause reputational and financial damage, and threaten organizational viability.
To effectively mitigate supply chain risk, it is vital that chief supply chain officers (CSCOs) are aware of, and comfortable with, the level of risk exposure and the effectiveness of the controls in place for the risks that may impact the business. Without this knowledge, risk mitigation strategies will not be appropriately resourced and the risk of control failures increases.
Start by identifying risks. To obtain a consistent, holistic view of supply chain risks, be sure to examine not only the risks inside the supply chain function, but also external risks driven from customers, suppliers, regulators and NGOs. Additionally, organizational risk experts (e.g., corporate enterprise risk teams, internal audit) can provide risk appetite and risk reporting insights.
Next, assess the materiality of risks and document the controls that can minimize the likelihood of a risk occurring or help to respond to a risk after an event. For example, to mitigate supplier failure risk, conduct due diligence and supplier audits, and to mitigate cyber risk, develop vulnerability analysis and continuity plans.
Finally, evaluate your risk appetite, documenting the most significant risks that will require enhanced controls. Examples include a single-sourced supplier based in a politically unstable location and key IT systems vulnerable to cyberattacks. When faced with these risks, CSCOs will require additional resources from corporate management and potentially the board to manage the impact to the supply chain organization.
Utilize technology in SCRM to increase effectiveness of supplier risk tactics
Key tenets of supply chain risk management are enhancing resilience and improving competitiveness.
Supply chain transformation, however, complicates supply chain risk management. Lean but complex and globally dispersed operations add risk, making it difficult to achieve agility and competitive advantage from the supply chain risk management strategy.
Companies leveraging supply chain technologies and digital transformation in risk management increase their effectiveness in supplier risk tactics by nearly 2x. Risk professionals and their peers in the supply chain and procurement organizations must first develop a supply chain strategy that identifies potential supply chain failure points and creates control measures to prevent interruption. Enterprise risk management (ERM) software, advanced analytics and digital technologies support the supply chain risk management strategy by enabling continuous risk review. Data transparency equips supply chain/procurement leaders responsible for supply chain risk management with the best information to determine risk-reward trade-offs. Additionally, many companies have automated risk assessment and monitoring.
New digital solutions are rolling out for supply chain/procurement monitoring, supplier financial risk assessment (most effective for public companies) and geopolitical risk capture. A cautious and purpose-driven evaluation of these solutions is recommended since few, if any, have predictive analytics capabilities built into them, although vendors claim they are developing machine learning (ML) and artificial intelligence (AI) to spot potential issues.
Supply chain risk appetite statements transform SCRM into a value-add
Eighty-nine percent of companies experienced a supplier risk event in the past five years, and almost two-thirds were delayed in responding because they lacked a framework to continuously predict, assess and manage sourcing risks. Despite this, only 35% of companies have a formal enterprisewide risk appetite statement in place, and even fewer (11%) have reached the maturity level of business unit customized risk appetite statements.
No company has complete mitigation readiness with scenario-based action plans for disruptions in the supply chain. At the same time, no company is immune to supplier risk, with most events attributed to supplier financials, capacity or compliance issues. It is critical to improve your risk readiness through synchronized business and supply chain/procurement strategies.
The risk appetite definition is the risk exposure assumed to achieve strategic and operational goals, sustain competitiveness and increase agility. Establishing a supply chain risk appetite statement drives risk awareness in the value chain and enables supply chain/procurement leaders to predict risk more accurately and put corrective measures in action faster. Formalizing risk appetite helps turn supply chain risk management into a value creation lever.
Formalizing risk appetite: Key benefits
Aligns business imperatives and supply chain/procurement goals. Connects business and supply chain/procurement strategies.
Elevates supply chain risk management to become more comprehensive and relevant.
Promotes continuous discussion at the executive level on supply chain risk management as a driver to thrive in uncertainty.
Improves the long-term prospects of the company.
It is increasingly important in a faster-paced global economy with greater complexities and more interdependencies across value chains to have a well-defined supply chain risk appetite statement. Without one, supply chain risk management may over-focus on post-risk-event impact containment, correction and recovery. Many stakeholders point directly to supply chain/procurement for ownership and call for action.
Prepare, draft and operationalize your risk appetite statement: Four steps to follow
Secure risk appetite buy-in. Ensure internal stakeholders as well as external partners and suppliers are aligned on a common set of risk management goals.
Assess risk preferences. Understand the organizational risk appetite (determined by the board) and the policy-led risk appetite (led by senior organizational leaders and subject matter experts), as well as the operational decision making of supply chain and business unit leaders.
Draft the risk appetite statement. Failure to provide guidance on how to act in uncertain situations often results in supply chain strategy decisions that fall outside the range of acceptable risk.
Communicate the supply chain risk appetite. Identify the critical risk appetite information to communicate to stakeholders, reinforce how and when to apply risk appetite guidance, and conduct continuous review to ensure maximum value creation.
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FAQ on supply chain risk management
What is supply chain risk management?
Supply chain risk management provides a consistent framework for organizations to become more resilient to physical and digital risks across the supply chain ecosystem. Risk professionals operate processes that identify risk indicators, prioritize and respond to risks, and escalate high-impact risks. They also establish governance to track interdependencies, bottlenecks and potential failure points over the product life cycle.
Why is supply chain risk management important?
Risk management enables supply chain organizations to thrive despite uncertainty, disruption and complexity in the business environment. The risk management strategy involves end-to-end supply chain planning, scenario planning and predictive analysis, all of which increase the organization’s change management capability. Being able to sense and respond to unanticipated changes in demand or supply — quickly and reliably and without sacrificing cost or quality — is a hallmark of winning supply chains.
How can we assess supply chain risks?
Most organizations focus on assessing internal risks and neglect the possible impact of external environment changes that might represent risks to delivering their plan. Use a consistent methodology for risk assessment: Begin by examining the risk and its impact, and then determine the requirements to resolve the risk and the expected result. Assess internal drivers of risk like cost, growth and complexity; and external drivers of risk including disruptive innovation, competition and regulatory change.
What strategies can we use to mitigate supply chain risks?
Supply chain risk mitigation is about identifying and managing external and third-party risks, and building capabilities to recover when they disrupt operations.
Readiness for short-term risks continues to elude supply chains, forcing them to react more to risk than be able to plan for disruption. It’s important to first analyze and define risk thresholds for supply chain/procurement activities. Then develop a governance framework to support risk oversight and risk-based decision making.
What is technology’s role in supply chain risk management?
Technology has proven to be a catalyst for improved supply chain risk management. The best companies utilize technology in SCRM strategy, increasing their effectiveness in supplier risk tactics by almost 2x. As risks evolve and new, high-impact risks emerge with increased complexity and velocity, automate risk assessment and monitoring to optimize SCRM performance and to help achieve expectations.