Cyber attacks, the COVID-19-pandemic and geopolitical tensions – the challenges of the past few years have shown how quickly supply chain processes can come to a standstill worldwide. This makes it all the more important for companies to implement strategic risk management. In our latest blog article, we discuss the current risks that supply chain managers should keep an eye on, and explain how they can create well-founded forecasts, take measures at an early stage and increase the resilience of their supply chain.
Risk analysis: What can jeopardize the supply chain?
Global supply chains are complex and exposed to a variety of potential risks that can jeopardize a company’s efficiency, business continuity and success. Effective supply chain risk governance and management are therefore critical. In order to assess and prioritize the potential challenges, it is important to first identify the risks.
The latter can be:
- Production bottlenecks: Problems at suppliers can lead to interruptions in the supply chain, such as insolvency, production stoppages, quality problems or delays in deliveries. If companies are dependent on certain materials or services, bottlenecks or disruptions in manufacturing processes may be imminent.
- Major weather events: Natural disasters such as earthquakes, storms, floods or fires pose a significant risk to companies. If a country’s infrastructure or transport routes are affected, this also has a direct impact on the supply chain.
- Fluctuating demand: If the demand for goods, materials or services changes, overstocks or understocks may occur in warehouses. Sudden changes in user behavior can therefore lead to inadequate capacity utilization or bottlenecks in meeting
- Sustainability, compliance and quality: circular economy, legal regulations, rethinking in society – the requirements for companies to meet due diligence obligations along the entire value chain are increasing. Not least because of the German Supply Chain Act, which has been in force since January 2023, and the new EU CRSD Directive, many companies fear competitive disadvantages if suppliers do not comply with social and environmental standards. Poor quality and breaches of compliance and sustainability regulations can lead to recalls, complaints and legal consequences.
- Political situation: Trade restrictions, changes in legislation or political tensions between countries can affect cross-border supply chains in particular, causing prices to rise or goods to reach their destination significantly delayed.
- Transportation: Supply chain disruptions can also be caused by traffic bottlenecks, delays, accidents, theft or damage.
- Labor: Strikes, lack of qualified employees or even industrial accidents can significantly limit the productivity and efficiency of the supply chain.
Depending on the industry, unique business conditions or geographical location, the risks for companies can vary. Therefore, a one-on-one-analysis is essential in order to be able to take appropriate measures to manage the potential crises.
Supply chain risk management: How companies can prepare against risks
Once the risks have been identified, companies can use targeted supply chain risk management (SCRM) to develop strategies in order to avert crises at an early stage or to be able to act and reschedule quickly in the event of an emergency. Risk mapping initially requires a high degree of transparency across the entire supply network in order to keep track of all suppliers’ production sites and branches, possible insolvencies or failures. Permanent monitoring of supplier performance is helpful – for example, an SCM platform can act as an early warning system for companies. It can also be helpful to diversify suppliers in order to fall back on alternative sources of supply in the event of problems.
Most importantly, open and regular communication between all supply chain actors through digital networking makes a decisive contribution to being informed about risks at an early stage. By exchanging information as seamlessly as possible, stakeholders can react quickly to changes such as major weather events or disrupted infrastructures. Further, demand forecasts through AI-based applications or Big Data analytics provide sound decision support and underpin holistic supply chain risk solutions.
Last but not least, an emergency plan is essential for a successful supply chain risk management, documenting the exact steps and sequences to be taken in the event of an emergency – from setting up a crisis team to securing back-up suppliers and regularly conducting emergency drills. The SCRM can be divided into four phases: Identification phase, Assessment phase, Control phase and Monitoring.
Digital solutions for a holistic SCRM
A strategic supply chain risk management is based on technologies and platform solutions. The integration of SCM software, blockchain technology, Internet of Things, AI, Big Data, predictive analytics or Robotic Process Automation (RPA) plays a crucial role in monitoring the supply chain in real time.
With the increasing level of digitization and networking, the issue of cyber security is becoming increasingly important: data exchange and communication must be protected accordingly, which is why IT security should be considered from the outset when implementing risk management. And yet, it is not only the protection of the company network by firewalls, intrusion detection and intrusion prevention systems that is of great importance. For IT security within the supplier network, it is also advisable to encrypt network connections, e-mails and sensitive data. In addition, multi-level authentication, access controls, and regular security monitoring and analysis contribute to an increased IT security.
Risk management as a driver for digital transformation
Depending on the complexity of the supply chain, it is important to check which technologies can provide useful support. For very extensive supply chains, for example, SCM software with an integrated SCRM tool has proven to be profitable. Therefore, crisis and risk management can be seen as a significant driver of companies’ digitization efforts. Particularly in purchasing and in procurement, digital progress is increasingly motivated by risk and crisis management in addition to classic digitization goals such as process efficiency, process transparency and cost reduction.
Service providers specializing in supply chain processes, such as Hermes International can advise companies on strategic steps as well as help with implementing modern SCRM tools.