The globalization of businesses over the last decade and the manufacturing industry, in particular, has made it imperative for executives and risk managers to reassess the risks facing their organizational processes and their supply chain activities. Effective supply chain risk management in manufacturing companies is often hindered by factors, such as supplier failure and non-traditional risks. Furthermore, supply chain vulnerability is also increasing due to myriad risks, including those related to supplier relationships, manufacturing processes, and the shipment of finished goods.
Supply Chain Meaning
Supply chain activities encompass the sourcing of raw materials, manufacturing, inventory management, logistics and tracking, and distribution and fulfillment. A streamlined supply chain can minimize businesses’ costs and boost productivity in the production cycle, while a poor supply chain process can negatively impact ROI and customer satisfaction.
Components of the Supply Chain
The different components of the supply chain are as follows:
Raw material sourcing
A supply chain begins with the extraction and/or sourcing of raw materials and semi-finished/finished components.
Manufacturing
The company uses raw materials or semi-finished/finished components to manufacture final products that are ready to be sold.
Inventory management
The aim of inventory management in the supply chain is to maintain the optimal level of stocks to ensure that the right products are available at the right time and place. Inventory is held at several levels of the supply chain.
Logistics and tracking
Logistics supports the transportation of raw materials and products between locations or facilities as they move along the supply chain.
Distribution and fulfillment
Distribution refers to the ways in which manufacturers get their products to customers. A distribution channel includes all businesses or intermediaries through which a product (or service) passes before it reaches the end consumer.
Raw material sourcing
A supply chain begins with the extraction and/or sourcing of raw materials and semi-finished/finished components. Before this, a manufacturer needs to research, select, order, and pay for the raw materials that are required for the business. The manufacturer needs to choose the correct supplier/suppliers based on quality, price, supplier reputation, and other factors.
Manufacturing
In this step of the supply chain, the company uses raw materials or semi-finished/finished components to manufacture final products that are ready to be sold. However, raw materials and components are only one part of manufacturing. Other important components comprise skilled labor, machinery, etc. Like all the other components of the supply chain, manufacturing involves coordination, collaboration, and decision-making.
Inventory management
The aim of inventory management in the supply chain is to maintain the optimal level of stocks to ensure that the right products are available at the right time and place. Inventory is held at several levels of the supply chain. Inventory and its management are important as they enable economies of scale, lead to savings in transportation, improve services to customers, and act as a hedge against future market volatility as well as unforeseen shocks.
Logistics and tracking
Logistics is the process and coordination of products, raw materials, and services across the supply chain. Logistics supports the transportation of raw materials and products between locations or facilities as they move along the supply chain. Tracking helps in the logistics process by using advanced technology (methods and systems) to enable stakeholders to know where products, materials, or other resources are physically located at any time.
Distribution and fulfillment
Distribution refers to the ways in which manufacturers get their products to customers. A distribution channel includes all businesses or intermediaries through which a product (or service) passes before it reaches the end consumer. It comprises wholesalers, retailers, distributors, and even the Internet. On the other hand, fulfillment involves the process of receiving goods and then processing and delivering orders to customers.
Key Supply Chain Risks: What Manufacturers Need to Know
What is supply chain risk?
The absence of an effective supply chain management strategy can lead to risks in the supply chain, such as those related to supplier relationships, manufacturing processes, and the shipment of finished goods. Because today’s interconnected supply chains don’t lend themselves to neat compartmentalization, it is often difficult to separate one kind of risk from another. However, by treating supply chain risks more holistically, it is easier to identify and capitalize on these logical relationships, ensuring that fewer issues remain overlooked or unaddressed.
Types of supply chain risks
Supply chain risks fall into the following broad categories:
Financial risks
These include supplier relationships like supplier bankruptcies, fluctuations in exchange rates, sudden cost increases, etc. These risks are generally caused by unfavorable economic conditions or changes in trade policies, which may adversely affect all stakeholders across the entire business supply chain.
Environmental risks
Global climate change and natural disasters like floods and earthquakes disrupt supply chains and logistics. Climate change affects the supply of raw materials and leads to shortages. Not being environmentally responsible and contributing to pollution through emissions and discharge of industrial effluents impacts a company's brand.
Demand risks
This is caused by declining demand or changing market demand dynamics, improper inventory management, global recession, and seasonal variations. Demand risks could occur due to demand planning complexity and are often the product of a lack of insight into year-over-year purchasing trends or unpredictable demand.
Cybersecurity risks
This recent threat to supply chain operations is attributed to the increased use of advanced technology and the digitization of supply chain operations. Buyers and sellers may face cyber security breaches. Such attacks can lead to compromised confidential information, and monetary losses.
Operational risks
These are caused by machinery breakdowns and factory downtime, labor shortages, improperly trained workers, inefficient workflows, and human errors, which could lead to delays in manufacturing and processing orders, shipping, and payments, thereby disrupting the supply chain.
Legal and contract-related risks
These include risks related to non-compliance with environmental, social, and governance (ESG) regulations. Such risks include fines, sanctions, and financial loss that threaten any business. Furthermore, non-compliance can result in knock-on operational disruptions, including reputational damage.
Supply Chain Risks and Mitigation Strategies
| Challenge | Mitigation strategy | |
| Disruptions in distribution | When a key supplier moves its operations to another country, it can have a significant impact on the cost of production and lead to product and raw material shortages for a manufacturer. Supply chain risk management strategies must ensure regular communication and the presence of strong contracts between value parties to prevent such unforeseen contingencies. | Invest in supplier relationships: Developing strong collaborative relationships with suppliers, especially key suppliers, is a way to secure priority for the company’s order in terms of supply and shortages. Trustful supplier relationships also facilitate open communication and cooperative problem-solving, which is critical in times of instability. Another way of mitigating distribution challenges is by diversifying the supplier base. |
| Complex regulations | Foreign and domestic government regulations, trade compliance requirements, and industry standards impact product or service availability and the supply chain. Supply chain laws include requirements like sustainability, environmental impact, human rights, anti-corruption, and more. For instance, supply chain operations like transportation have a huge impact on the environment due to the significant emissions of greenhouse gases. | Ensure transparency in supply chain operations: This could be done by adopting advanced tools to track and report on activities and partnerships, improving visibility and transparency across the extended supply chain. Sustainability solutions that integrate actual ESG data can also help. Modern product footprint management solutions make it easier for companies to calculate their carbon footprint for products and across the entire value chain. This includes real-time updates of regulations as and when they change, and the expedited ability to report progress as required. |
| Global labor shortage | Challenging demographic trends like the aging of the labor force as well as increased worker expectations in terms of remunerations and increased demand for workers with technology-related skills are leading to labor shortage. The supply chain is also being impacted by a specific skills shortage, where skills gaps are leading to a shortage of qualified workers. Due to increasing labor pressures, supply chains will experience higher costs and will be more prone to disruption in the coming years. | Emphasize workforce skill development and training: Investing in employee training programs can enhance workforce skills and enhance adaptability. Furthermore, cross-training employees in different roles can lead to the creation of a workforce that is versatile and resilient. Also, by offering career growth opportunities and not just jobs, companies can attract and retain skilled workers. |
| Cyber threats | While the benefits of cloud-based supply chain management tools are evident, there is also an increased risk associated with the rise in IoT networks and connected devices and assets. Such systems can provide additional portals for would-be cybercriminals. The increased threat of cyberattacks has made it paramount that companies understand both their own cybersecurity protocols and those of their suppliers. Any organization with access to the company’s network or systems can pose a risk. | Implement robust security measures: Conducting regular security audits can help a company discover vulnerable links in the supply chain software stack and establish how to minimize cybersecurity threats, such as investing in security protocols, firewalls, and data encryption. |
| Logistics risks | The past few years have seen many newsworthy shipping problems including ocean freight bottlenecks, maritime strikes, and widespread port closures. For instance, a recent instance involved one of the world’s largest container ships blocking the Suez Canal for over a week and wreaking havoc on the global supply chain. Other logistics risks are the result of pressure to speed up delivery times, especially in e-commerce. Natural disasters, including hurricanes, tsunamis, or earthquakes can cause profound damage to infrastructure, hampering transportation routes and causing substantial delays. | Implement a robust logistics contingency plan: This ensures business continuity during supply chain disruptions. Businesses must establish solid contingency plans and logistics and transportation management solutions to effectively navigate supply chain risks. Implementing supply chain route optimization software helps determine the most efficient routes, minimizing bottlenecks during transportation. |
| Geopolitical risks | This type of supply chain risk encompasses disruptions arising from political instability, regulatory changes, or trade restrictions. Political upheavals, changes in government policies, or trade wars can often surprise companies and drastically impact their budgets, P&L, and even prospects of staying in the market. | Diversify the supply chain geographically: Spreading the supply chain across different regions is one way to minimize the impact of geopolitical instability on supply chains. Globalization has made it easier for companies to diversify their supplier base by finding alternative sourcing options across various regions. |
Solutions to Overcome Supply Chain Risks
- Gain better and extended visibility into your value chain and suppliers through cloud software that provides analytics and KPIs for monitoring global and plant-level performance.
- Monitor the supply chain in real time with technologies like AI, machine learning, IoT, and advanced analytics for better visibility and real-time alerts that allow for faster response times.
- Quickly react to changes by reallocating resources and relying on shorter-term supplier contracts.
- Regionalize sourcing using nearshoring, friend-shoring, and integrating knowledge to reduce dependence on global suppliers during times of delays and unrest.
- Move to agile planning to cope with uncertainty and keep more safety stock on hand “just in case.”
- Improve transparency and traceability to improve supply chain performance, detect bottlenecks, and comply with sustainability mandates.
- Build in circular and sustainable practices, such as integrating environmentally responsible benchmarks into areas like product design, materials sourcing, end-of-life product management, and using recycled plastics for 3D printing.
- Shore up supplier relationships by diversifying your supplier base and facilitating supply chain planning and collaboration based on standards-based data sharing and cloud software.
- Develop risk-based supply chain plans by running simulations, projecting the impact of factors like demand surges through scenario planning, and using advanced data analytics to gain insights into all risks.
Real-world Examples of Strategies Used by Companies to Overcome Supply Chain Risks
Given below are some real-world examples of major companies that faced certain supply chain risks and the mitigation strategies that they used to overcome them.
| Company | Industry | Supply chain challenge and mitigation strategy |
| Apple Inc. | Technology | Risk: Supplier Dependency Apple diversifies its supplier base to avoid dependency on a single supplier. They also invest in long-term contracts and maintain strong relationships with multiple suppliers to ensure a steady supply of components1. |
| Toyota | Automotive | Risk: Natural Disasters After the 2011 earthquake and tsunami in Japan, Toyota implemented a comprehensive risk management strategy. The company increased its inventory levels, diversified its supplier base, and developed a robust disaster response plan. |
| Walmart | Retailer Corporation | Risk: Demand Planning Complexity Walmart uses advanced data analytics and machine learning to predict demand patterns. This helps the company optimize inventory levels and reduce the risk of stockouts or overstocking. |
| Sony | Technology and consumer durables | Risk: Operational Risks Sony faced a significant operational risk during the 2011 PlayStation Network outage. The company responded by enhancing its IT infrastructure, improving cybersecurity measures, and developing a more resilient operational framework. |
| Procter & Gamble (P&G) | Manufacturing FMCG | Risk: Geopolitical Risks P&G mitigates geopolitical risks by maintaining a geographically diverse supply chain. They also engage in scenario planning to prepare for potential geopolitical disruptions. |
Case Study
| Case Study: How a Supply Chain Strategy Helped a Multinational Automotive Original Equipment Manufacturer Mitigated the Risk of Natural Disasters |
| Background: A leading multinational manufacturer of automobiles faced significant challenges due to a major natural disaster that destroyed its manufacturing capacity, which plummeted by 62.7% as suppliers were located in affected regions, causing a shortage of essential parts. Also, production stoppages resulted in substantial financial losses and threatened its market position. The company realized the importance of implementing proper strategies to overcome the above challenges. |
| Solution: We worked closely with the company’s leadership team to implement robust supply chain risk mitigation strategies that incorporated key elements such as: Supplier Diversification: The company diversified its supplier base to reduce dependency on suppliers in a single geographic region. It established relationships with multiple suppliers globally to ensure a steady supply of components. Increased Inventory Levels: To buffer against future disruptions, the company adopted a more flexible inventory management system, allowing them to maintain higher stock levels without significantly increasing costs. Robust Disaster Response Plan: The company developed a comprehensive disaster response plan to quickly recover from future disruptions. It also conducted regular drills to ensure preparedness. Advanced Risk Management Systems: The company implemented advanced risk management systems to monitor and mitigate potential supply chain risks. It used data analytics and real-time monitoring tools to identify and address risks proactively. This included tracking supplier performance and geopolitical developments. |
| Results: Improved resilience: The company’s supply chain became more resilient to disruptions, allowing it to recover quickly from future incidents. Reduced Downtime: The increased inventory levels and diversified supplier base reduced the likelihood of production halts. Financial Stability: By mitigating supply chain risks, the company was able to maintain financial stability and protect its market position. Enhanced Reputation: The company’s proactive approach to risk management enhanced its reputation as a reliable and resilient manufacturer. Thus, the implementation of robust mitigation strategies enabled the company to overcome its supply chain risks, allowing it to regain financial stability and protect its market position. |
Conclusion
Stringent regulations, labor shortages, ESG concerns, and logistics bottlenecks are creating significant risks to global supply chains. The supply chain industry will increasingly move along the path of digital transformation as machine learning and IoT-based software could mitigate these and other risks. Companies that have not yet considered streamlining operations through supply chain optimization software would be advised to start sooner to avoid bearing the brunt of these risks.
