RSM Resources

Managing your supply chain risks

There are numerous risks — apparent and hidden — within a company’s supply chain and just as many strategies to mitigate them. But what are the circumstances that can cause problems in maintaining a smooth flow of products? When conducting risk assessment of your supply chain, consider the following factors:

• Supplier missteps
• Political instability
• Terror and security threats
• Exchange rates
• Product shelf life
• Customer demands
• Labor disputes
• Shipping disturbances

If any of these emerge as an obstacle, ask yourself, “What effect will this have on my brand image, customer service performance, overall costs and compliance with regulatory requirements?”

Failure to assess and mitigate risk factors in your supply chain — and plan accordingly — can negatively affect merchandise quality, client retention, brand strength and corporate earnings. To avoid losses, managers should tailor risk strategies to address needs specific to their organizations.

Knowing what the hazards are, inside and outside of your company, can help you zero in on potential control gaps. A risk assessment is designed to pinpoint these areas of concern.

Where to look for threats
A risk assessment should take into account the following:  

• Events — Employment practices, product failures, business disappointments, process and delivery breakdowns, damage to physical assets and regulatory reporting errors.
• Causes — An inefficient or ineffective method, employee inaccuracy or fraud, and system unavailability due to manmade or natural disasters.
• The bottom line — How will your financial performance, brand image and regulatory-compliance standing be affected? Risks that aren’t easily quantifiable shouldn’t be ignored.

It takes two
Two types of risk need to be evaluated within all your business processes, including risks within your supply chain. 

Inherent (gross) — Affects an entity in the absence of any actions management might take to alter either the risk’s likelihood or “impact.”

Residual (net) — Remains after management’s response to the risk.

Where to start
When you begin your risk assessment, explore the inherent risks first. Once they’re identified, rank them according to how they would affect your organization and likelihood of an occurrence. For example, an event such as a large-scale terrorist attack may be viewed as unlikely to happen, but could have a large financial effect. Therefore, it must be considered and compared to a more common, less-consequential situation that could compound itself into a serious problem.

Conduct an evaluation of existing controls designed to prevent or mitigate these hazards. Any control gaps should be closed while keeping competing priorities in mind (e.g., providing world-class service, reducing transaction costs and cutting working capital). 

When you’re ready to address risk in your supply chain, prioritize based on vulnerabilities, not necessarily probabilities. Look at the complete supply chain and focus on potential interactions among specific risk, processes and systems, including outside parties and scenarios. 

Is less really more?
Traditionally, the easiest way to manage supply chain risk has been through inventory. However, reducing quantities increases potential negative effects of the smallest of interruptions. Attempts to drive costs out of supply chains through methods such as diminishing stock, single sourcing of raw materials or adopting just-in-time manufacturing and delivery techniques, can add to the complexity of supply chain risk. 

As inventory is reduced and international suppliers are used, shipments that move through the supply chain can change carriers five to six times, increasing the possibility for disruption.

Many companies are leveraging their supply base by annually reviewing suppliers based on quality, delivery, cost and competency. When merchant performance issues are found, companies should develop a recovery plan and monitor the supplier against it.

Your business can prepare for supply-chain disturbances by right sizing your capacity, supervising inventory and, most importantly, by evaluating risks, controls, gaps and weaknesses.

Bill Buhmann is a managing director with RSM McGladrey Risk Management. For more information, contact him at
bill.buhmann@rsmi.com.
 
Dick Strojinc is a director with RSM McGladrey Consulting. For more information, contact him at dick.strojinc@rsmi.com.