Supply Chain Issues - Risks in the Supply Chain

Table of Content

In an uncertain business environment, the risk is always present. Risk is the variance of the expected outcome. No one can guarantee that the expected will match the actual.

The supply chain involves many parties, ranging from material suppliers, production, customer demand, transportation, warehousing, distribution, and others. The goal is to ensure that the finished product reaches the consumer correctly.

Professionals face high uncertainty in managing supply chains. Every supply chain process has risks that are likely to occur. Every day these professionals have to deal with unexpected changes.

Companies will face several risks in a constantly changing business environment; for example:

Changes in consumer demand.
Unexpected transit delay.
Supplier problems.
Production problems.
Lack of warehousing causes delays in the delivery of goods to consumers.
Cyber ??security.

In addition to these problems, risks to supply chain management can occur due to natural disasters.

Some examples of natural disasters include earthquakes, floods, tsunamis, volcanic eruptions, epidemics, etc.

In general, companies apply standards in many ways.

Example:

Material quality standards
Material price standards
Standard material delivery time from suppliers
Production process standards
Delivery time standards

In an uncertain business environment, actual results do not always match performance standards. The difference between direct and standard supply chain results is the variance identified as supply chain risk.

Can identify supply chain performance variance as a good or unfavorable for company performance.

For example, the company sets material price standards and material usage volume standards in the production process for material supply. The actual purchase price of materials can change at any time.

If the actual material price is higher than the standard material price, there will be an unfavorable material price variant. On the other hand, if the actual cost of the material is lower than the regular price.

Variance in supply chain performance is a supply chain risk. Supply chain risk needs to be managed appropriately to minimize the impact of risks that occur and affect the company's overall performance.

There are three tactical steps to managing supply chain risk: identification, assessment, and risk management.

Risk Identification

A professional supply chain team needs to brainstorm potential risks in each supply chain process.

When brainstorming, we identify some of the potential risks if the situation changes.

The question is, if there is a risk, what risks will arise?

Some examples of risks that will occur in a company's supply chain system in the event of a natural disaster, namely:

Risk of difficulties in the provision of material volume.
The risk of material prices.
The risk of material delivery.
The risk of the production process.
The risk of delivery of finished products.

Brainstorming discussions should involve multiple teams from various organizational divisions, such as marketing, production, finance, technology, human resources, etc.

It aims to obtain the results of a comprehensive discussion in identifying potential risks in the company's supply chain system.

Routine risk

This risk generally occurs due to unexpected delays in transit modes of transportation, changes in orders from consumers, and problems with suppliers.

In addition are theft, warehousing systems, and production that do not work correctly.

All of that can interfere with delivering finished goods products to consumers.

Natural disasters

Although natural disasters are unpredictable, many companies are trying to anticipate the damage to infrastructure caused by natural disasters.

Natural disasters generally cause overall damage to transportation and logistics infrastructure. Risks to the supply chain system need to be identified from this natural disaster.

Issues

Material quality and product quality are essential issues in supply chain success. The quality of the material will determine how efficient and effective the production process is. Materials that do not meet quality standards will cause waste in the use of materials for production.

In addition, the quality of the material will affect the quality of the finished product.

In the context of supply chain management, the quality of material supply and the quality of the finished product will determine sooner or later the process at customs.

Companies need to identify supply chain risks due to the quality of materials and finished products that do not meet quality standards.

Mistakes in forecasting

Forecasting consumer demand for the sales cycle in the successive few periods will determine the accuracy of how many units of the product should be produced.

Then how many materials are needed to meet production needs, and how many materials to buy.

If there is an error in the forecast, it will result in an error in determining the inventory level. Because consumer demand is uncertain, demand forecast errors are very likely to occur. It is often called the bullwhip effect. Companies need to identify supply chain risks due to incorrect demand forecasting.

Damage

Damage to materials or products often occurs, especially when handling goods during shipping and storing goods in warehouses. Supply chain risks due to damage to goods need to be identified.

Social, political, and regulatory risks

Identify risks due to strikes, changes in political policies, and regulations of a country's imports and exports and their impact on supply chain risks.

Customs and ports

Changes in regulatory policies in customs and procedures for handling goods at ports need attention in identifying supply chain risks.

Terrorism and piracy

Although these incidents are relatively rare, it is necessary to identify their impact on supply chain risks.

Product safety issues

How much should a product be recalled for products with well-known brands because of product safety issues? Almost all. The company does not want to risk its brand when facing this product safety issue. Risks to the supply chain need to be identified if the company faces safety issues.

Changes in socioeconomic and demographic Socioeconomic and demographic changes, such as an increase in per capita income, gross domestic product, inflation, and changes in demographic structure, will determine the supply and demand of a product.

Companies need to comprehensively identify these socioeconomic changes and their impact on supply chain risks.

Changes in currency rates

Changes in foreign exchange rates against the rupiah impact price stability, trade, investment, and the economy as a whole. Companies need to identify the potential risk of changes in foreign exchange rates and their impact on supply chain risk.

Technological developments

In the last few decades, technological developments have been very rapid, especially the convergence of the internet, which has disrupted many conventional business models. Companies need to identify the disruptive impact of these technologies on supply chain risks.

Risk Assessment

The risks that have been identified are then assessed against the threat. Risk assessment aims to map risk priorities.

Determination of risk priority is based on the likelihood of risk events (likelihood of events) and the impact of risk on supply chain performance. Generally, companies set an acceptable risk impact tolerance limit.

Risk tolerance limits in a company's supply chain vary greatly depending on the type of commodity, inventory, or product.

Risk Management

Risk management is carried out potential risks and supply chain risk impacts that have been mapped. Risk management includes risk prevention, risk response, and risk impact recovery.

Risk prevention. Risk prevention is carried out to reduce or minimize risk events in the form of:

Continuous human resources training and development.
Preventive maintenance regularly
Update standard operating procedures (SOPs)
Qualifications for vendor selection.
Minimize the use of a single supplier.
Inspection of production processes.

Risk Handling

If a risk occurs, it is necessary to carry out risk handling quickly and appropriately immediately. Handling this risk includes the following actions:

Emergency response
We monitor the adequacy of production capacity, storage, and delivery of goods.
Establish a crisis center if a risk event significantly impacts supply chain performance.
Execute risk management protocols.

Recovery

Recovery efforts are carried out to normalize the performance of supply chain systems that are disrupted due to risk events.

Supply chain risk is a frequent occurrence and has a significant impact on a company's performance.

Therefore, SCR management is often called Supply Chain Risk Management (SCRM).

SCRM is implementing a strategy to manage risks that can disrupt the company's supply chain. This risk manager aims to reduce the impact and level of occurrence to ensure the continuity of a company's business.

Micro SCM