Supply chains can change in a heart beat. A massive natural disaster can take out entire countries, which can have a debilitating effect on the global economy. Political turmoil in different regions can cause export changes, limiting the amount of product supplied to the global market. Human rights cases can turn into massive labor strikes, halting production in an entire industry. These risks need to be managed, but if you try to manage everything at once – all by yourself – you’ll end up pulling your hair out in frustration.
In order to manage these potential risks effectively, the Chartered Institute of Procurement and Supply (CIPS) produces a quarterly Risk Index. You can use the report to analyze the macro factors that might affect your specific supply chain based on region or country. That allows you, as a supply chain manager or other professional, to mitigate risk. The CIPS Risk Index assesses greater than 90% of the global economic activity. There are also archive editions available over the past 20 years to demonstrate historical context and fluctuations of the economy. Using this resource you can attempt to alleviate supply chain disruption and balance cost with risk, especially important in the concept of lean manufacturing.
For example, the latest report indicates a high risk in the middle east (probably due to war), Argentina (probably due to a collapsing economy), and North Africa (probably due to political turmoil). If your current supply chain utilizes suppliers from these countries you may want to alleviate risk by finding suppliers in places with a low risk rating such as North America, Australia or Scandinavia. However, the prices in these countries could be drastically higher than your original sources. That is the challenge of mitigating risk.
As a professional responsible for managing this type of risk, it is critical to maintain up to date knowledge as the CIPS index can change based on economic factors. According to Supply Chain Standard, there has been a shift in CIPS risk index away from advanced economies and back to the suppliers. If you are not keeping up with the trends you might be suddenly caught off guard. Some threats might never happen, and yet it is still important to be aware of these potential disruptions and have plan for handling a situation.
Understanding supply chain risk is crucial for professionals. But, understanding is just the beginning. You need to take it one step forward and learn how to balance risk with cost in order to have a thriving business that is undeterred from potential problems in their supply chain.
If you’re interested in this topic, or want to advance in the field of supply chain management, check out Kettering University Online’s Master of Science in Lean Manufacturing.
Photo: Supply Chain Digital