The first step in supply chain risk management is to understand the sources of risk.
Introduction:
Supply chain risk management has become an important issue for companies in recent years. Many companies have realized that their previous focus on efficiency and low costs in business strategies is not sufficient after being impacted by the US-China trade war and the pandemic. It is evident that the potential losses caused by shortages and disruptions are much greater compared to the savings in production costs. Therefore, the topic of supply chain resilience is continuously being raised.
The first step in supply chain risk management is to understand the potential sources of risk. This article categorizes different risk sources to help companies identify and address potential risks.
Sources of Supply Chain Risk:
Supply chain risks can be mainly classified into external and internal risks. External risks are primarily related to the company's upstream and downstream partners, the market, or the environment, while internal risks are mainly associated with the company's internal operations.
External Sources of Risk:
External risks in the supply chain can be divided into demand-side, supply-side, and environmental risks.
Demand-side:
The main risk on the demand side is the changes in downstream customer demand (including quantity and quality requirements) and shipping issues. For example, due to the impact of remote work, there may be a sudden surge in demand for laptops, making it difficult for upstream manufacturers to cope with a large number of rush orders. These issues are related to the manufacturer's production capacity, inventory management, and related capabilities. Companies must consider how to simultaneously reduce their operational and inventory costs while meeting customer demands.
Supply-side:
The most common risk on the supply side is shortages of raw materials and delayed deliveries. If critical components are missing, it becomes impossible to ship the goods, leading to delays in the company's delivery schedule or inventory loss. In the past two years, the automotive industry faced a predicament of delayed deliveries due to a shortage of automotive chips. Some car manufacturers are even considering investing in chip production themselves, as the losses caused by material shortages are significant.
Another risk on the supply side is when suppliers are unable to provide compliant products. In product design, there may be limitations in technology or capacity that prevent suppliers from providing support. Such risks require communication and collaboration to resolve the issues.
Environmental:
Environmental risks can be analyzed using the PESTEL model (political, economic, social, technological, environmental, legal). Changes in these environmental factors can cause operational issues for companies. It is worth paying attention to "legal" and "political" issues, as trade regulations have become increasingly complex due to factors such as the trade war and supply chain decoupling. Companies need to understand the impact of regulations on product sales. Additionally, recent free trade agreement projects and regulations, such as RCEP, TPP, EVFTA, can influence the competitiveness of export products.
Another important issue to consider is ESG (Environmental, Social, and Governance). ESG has become significant in Europe and the US, but the concept is still not widely adopted in Asia. Companies need to understand whether their supply chains meet market and regulatory requirements to successfully enter high-end international markets.
Internal Sources of Risk:
In addition to external risks, companies must also manage internal risks. As companies internationalize, their internal production processes and logistics become more complex. Without proper management, this complexity can lead to chaos in shipping. Therefore, this risk must be addressed. Internal risks in companies are mainly related to operational management and control.
Operational management:
This includes all aspects of product production, including procurement, warehousing, production, inventory, logistics, and shipping management. Any errors in these processes can lead to difficulties in shipping. Most of these tasks fall under the responsibility of production managers, and supply chain managers can work together with them to analyze and design production processes that balance flexibility and low costs.
In addition to product production and logistics, cash flow is also crucial. Ensuring a stable source of funding is an issue that supply chain managers must analyze.
Control and governance:
When operating, companies establish various SOPs (Standard Operating Procedures) and quality management rules, including procurement, quality control, and payment procedures. The work of risk management is to ensure the effective implementation of these rules and consider how to optimize them. Relevant analysis methods include lean production and Six Sigma. Additionally, companies can refer to ISO standards to review their management guidelines.
Conclusion:
This article has compiled potential sources of risks in the supply chain. Companies can use this compilation to analyze their own operations. After identifying the sources of risks, companies need to assess the potential impacts and prepare contingency plans. These related topics will be discussed in future articles.
Image by Rilson S. Avelar from Pixabay
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