Global Supply Chain Risk: Don’t Wait, Mitigate
Having a global supply chain risk management strategy in place can not only increase value to your customers but also reduce your costs and increase performance.
Companies globalize supply chain management to increase competitive advantage, add value to the customer, and reduce costs through global sourcing. But global supply chains also increase risks from considerations domestic companies traditionally face such as demand and supply variability, limited capacity, and quality issues.
Global supply chains also result in greater customer expectations, global competition, longer and more complex supply chains, increased product variety with shorter lifecycles, and security, political, and currency risks.
To minimize risk, first identify the sources and types of potential risk, and estimate their probability and impact. Sources and types of supply chain risk include:
- Disruptions from natural disasters, war, terrorism, and labor disputes to supplier bankruptcy.
- Delays caused by high capacity utilization, inflexibility, or poor supplier quality or yield.
- Systems risk from information infrastructure breakdown, system integration, or extent of systems being networked.
- Forecast risk based on inaccurate forecasts due to long lead times, seasonality, product variety, short lifecycles, small customer base, or information distortion.
- Intellectual property risk covering vertical integration of the supply chain, global outsourcing and markets.
- Procurement risk encompasses exchange rate risk, input prices, purchasing material from a single source, and industry-wide capacity utilization.
- Transportation risk includes shipment delays, disruptions, and transporting hazardous materials.
- Receivables risk covers customer numbers and financial strength.
- Inventory risk based on rate of product obsolescence, inventory holding cost, product value, and demand and supply uncertainty.
- Capacity risks based on cost and flexibility.
When you estimate the probability and impact of potential risks to your supply chain, involve both internal and external resources and information sources. Next, create and implement risk mitigation plans. Depending on the types of risks you identify, strategies can include:
- Boost capacity. Consider low-cost, decentralized capacity for predictable demand and build centralized capacity for unpredictable demand.
- Engage redundant suppliers. Have redundant supply for high-volume products, less redundancy for low-volume products.
- Increase responsiveness and flexibility. Cost over responsiveness for commodity products and responsiveness over cost for short-lifecycle products.
- Add inventory. Decentralize inventory of predictable, lower-value products and centralize inventory of less predictable, higher-value products.
- Aggregate demand. Increase aggregation as unpredictability of demand and supply grows.
- Increase source capabilities. Look for capability over cost for high-value, high-risk products and cost over capability for low-value commodity products.
By creating and implementing risk mitigation plans for your global supply chain, you can help increase efficiency and reduce costs.