Unforeseen supply chain vulnerabilities and disruptions have adverse impacts on all parties across the supply chain by altering the flow of commodities. A key reason for the disruptions and vulnerabilities is the lack of a robust framework to identify and efficiently manage supply chain risks. Without a robust risk management model, risk awareness and response follow an ineffective reactive cycle whereby a risk event occurs, leads to a predictable rise in awareness, which is followed by a gradual return to low awareness. An effective risk management framework is one that strives to address risks proactively and optimize an organization’s supply chain response after the occurrence of a risk. A proactive-inclined risk management model positions an organization and its supply chain against risk consequently leading to both tactical and strategic benefits.
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Breaking the Reactive Cycle
As mentioned in the introduction section, many supply chain risk management approaches seem to follow a lifecycle; a risk even occurs leading to a predictable rise in awareness followed by a gradual return to low awareness. As a result, today’s risks become tomorrow’s lessons learned (Fan & Stevenson, 2018). To break from the reactive cycle, an organization should proactively and wisely position itself and its supply chain against risk.
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Notably, the supply chain risk management scope is extensive and covers all aspects of the supply chain. According to Fan and Stevenson (2018), at the tactical level, risk management should encompass continual activity detection, measurement, and assessment of potential supply chain disruption resulting from all types of supply chain risks and emanating. The process should also seek to identify risks emanating from both within and outside. Effective supply chain risk management should strive to manage, control, eliminate, or reduce potential or real risk exposure to the supply chain performance (Manhart, Summers, & Blackhurst, 2020). This allows an organization to break from the reactive approach to supply chain risk management.
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Risk Management Alignment
The effectiveness of supply chain risk management solutions depends on compatibility with a specific organization’s business strategy, products, supply chain partners, and markets. It is imperative that a business aligns its supply chain operations with its overall organizational strategy, less the supply chain generates risks for the entire company (Sáenz, Revilla, & Acero, 2018). It is worth noting that lowering risk in one area of the supply chain can simply shift the risk to another area. Owing to such complexities, there is no one-fits-all model for supply chain risk management (Fan & Stevenson, 2018). An organization should tailor-make its supply chain risk management framework to address all types of risks that are unique to its operations.
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Types of Supply Chain Risks
A well-structured approach to supply chain risk management categorizes risks in terms of known and unknown risks. Known risks are those that the organization can identify and are usually possible to measure and manage over time (Fan & Stevenson, 2018). An example of a known risk is a supplier bankruptcy disrupting supply. An organization can estimate the occurrence of this risk based on the supplier’s financial history and can also quantify the impact of the risk to the organization by considering products and markets that would be affected. On the other hand, unknown risks are impossible or considerably difficult to foresee (Fan & Stevenson, 2018). For instance, the sudden eruption of a volcano that has been dormant for a very long time, which disrupts a supplier the organization did not know was in its supply chain. Predicting such a scenario is almost impossible even for the most risk-conscious organizations. An effective supply chain risk management framework covers both known and unknown risks.
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Risk Management Framework
Managing Known Risks
For the management of a known supply chain risk portfolio, organizations can utilize a combination of digital tools and structured problem solving using four steps. Step one entails identifying and documenting the risks. For this, an organization can map out and assess all its major products’ value chains. This should be followed by a detailed assessment of each node of the supply chain –that is; suppliers, warehouses, plants, and transport routes. Identified risks should be entered on a risk register for rigorous tracking on an ongoing basis (Zhu, Krikke, & Caniëls, 2017). Notably, it is crucial to note parts of the supply chain where data is non-existent and further investigation is required.
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Step two involves building a supply chain risk management framework. An organization should score every risk on the register based on three dimensions to formulate an integrated risk management framework. The three dimensions are; (1) the impact of the risk to an organization if it materializes, (2) the probability of the risk materializing, and (3) the organization’s preparedness to deal with the specific risk. Notably, tolerance thresholds should be applied to the risk scores to reflect the organization’s susceptibility to risk (Ivanov, 2018). Ivanov emphasizes that it is significantly important that organizations design and use a consistent scoring approach to evaluate all the risks. Doing this allows for effective prioritization and aggregation of the threats; thus, identifying the highest-risk products as well as value-chain nodes with the greatest potential for failure.
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Step three entails risk monitoring. Persistent monitoring stands out as one of the crucial success factors in identifying risks. The emergence of digital tools owing to technological advancements has made it possible to efficiently identifying and tracking leading risk indicators even for the most complex supply chains (Ivanov, 2018). An organization must customize its monitoring system to meet its unique needs. The system should also have an early warning system that allows it to track top risks hence maximizing the likelihood of mitigating or at least limiting the impact of risk event occurrence (Manhart, Summers, & Blackhurst, 2020). Nonetheless, a successful monitoring system incorporates impact, probability, and preparedness perspectives.
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The fourth and final step involves organizational governance and regular review. For this step, an organization sets up a robust governance mechanism geared designed to review the supply chain risks periodically and define mitigating actions. An effective governance mechanism should be a cross-functional board encompassing participants representing every value-chain node (Zhu, Krikke, & Caniëls, 2017). The goal of the supply chain risk management governance is to improve the resilience and agility of the supply chain risk management framework.
Managing Unknown Risks
As mentioned earlier, unknown risks are difficult or almost impossible to predict or quantify. For these reasons, it is impossible to incorporate them in the above-discussed risk management framework for known risks. The best way to mitigate unknown risks is by building strong defenses and reinforcing them with a risk awareness culture. Strong defenses range from request-for-proposal language to worker training. Having strong defenses increases an organization’s preparedness to identifying and stopping unknown risks before they cause damage to an organization (Manhart, Summers, & Blackhurst, 2020). Figure 1 below exhibits typical layers of defenses employed by organizations to manage unknown risks.
Organizations should also foster a risk-awareness culture to help them establish and maintain strong defensive layers against unknown risks. A risk awareness culture also allows for a quick response to the occurrence of an unknown risk event. Organizations must encourage a culture that empowers managers and employees to pass bad news. This openness allows for the timely identification of risks that result from mistakes in the workplace (Bailey, Barriball, Dey & Sankur, 2019). Organizational leaders also need to clearly define and communicate the organization’s risk tolerance. Such a culture allows for open sharing of warning signs of both internal and external risks. Lastly, organizations should empower their employees to identify and react rapidly to external changes. Notably, this can be enabled by cultivating organizational citizenship (Manhart, Summers, & Blackhurst, 2020). A risk awareness culture compliments the strong defenses created by an organization consequently leading to improved risk management of unknown risks.
To sum up, it is critical that organizations build robust frameworks for managing both known and unknown supply chain risks. The process should begin with breaking from the reactive cycle that renders organizations ineffective in managing supply chain risks. Organizational leaders should also recognize and acknowledge that risk management is not simply about establishing frameworks and instituting governance as it also entails cultural and mindset shifts. Employing the approaches discussed in this paper can help organizations increase their effectiveness in manage supply-chain risks while optimizing their supply-chain strategies to achieve their full value.
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