Supply Chain Risk Assessment For Managing Global And Regional Disruptions – The procurement function plays a central role in supply chain risk management. Its key activities—selection of suppliers, acquisition of company inputs, and management of supply chain design—directly affect the company’s exposure to risk. These include major global forces, including geopolitical tensions, climate change, economic uncertainty and social equality.
An effective procurement function must work closely with enterprise risk management and business units, often taking the lead in risk mitigation. To do this well, it must use modern digital technology, including artificial intelligence.
Supply Chain Risk Assessment For Managing Global And Regional Disruptions
Ensuring transparency, prioritizing risks, developing real-time predictive algorithms and integrating risk management into the organization are key to the procurement value proposition.
Infographic: Supply Chain Risk 2021
Today, companies must act aggressively to address supply chain risks. The study showed that only 10% of companies have developed all the resilience capabilities necessary for successful development. The remaining 90% are unlikely to survive supply chain disruptions.
Building resilience requires the integrated use of people and technology. Procurement professionals need to collaborate with their colleagues inside and outside the organization while using cutting-edge digital tools to improve human capabilities.
Cooperation. The philosophy of risk management must change from reactive shutdown to proactive risk management and mitigation. To achieve this, procurement and risk management teams should align their objectives and strategy and collaborate on risk assessment and mitigation measures. It is important to keep the lines of communication open.
Global Supply Chain Management Best Practice Examples
Procurement professionals must also communicate with colleagues across business units, including product and project managers and department heads, to:
Digital tools. Identifying and mitigating supplier risk requires structuring, processing and analyzing data, tasks for which AI-powered digital tools have become invaluable. Traditional AI tools support supplier risk management through early data structuring and enrichment, predictive analytics, real-time delivery tracking and defining supply chain optimization strategies. For example, AI can fill gaps in datasets by categorizing consumption and supplementing the data with relevant details such as dependence on raw materials.
Traditional AI can also analyze data from various sources and create insights from real-time data, including news articles, financial reports and social media feeds. In addition, it can use vendor network data to predict and flag vulnerabilities, helping to make informed risk management decisions. Generative AI is not usually used for direct analysis of raw data. However, it can help assess suppliers and risk by automating document generation, streamlining communication and supporting predictive scenarios.
Rethinking Supply Chain Risk
Creating a clear understanding of suppliers through all levels of the supply chain is critical. Disruption often occurs at lower supplier levels. The risk of a second-degree disorder is approximately 21% greater than a first-degree disorder, and a third-degree disorder has an even greater risk, 27% greater than a second-degree disorder and 38% greater than a first-degree disorder. (See Example 1.) However, few companies maintain structured data about their second- and third-tier suppliers.
A variety of software options enhanced with artificial intelligence and optical character recognition can help gather supplier data by analyzing previous contracts, audit documents and bill of materials. Companies should ensure the availability of future data for analysis by collecting it in a structured way. For example, companies should modify supplier portals so that first-tier suppliers can enter the necessary information about their suppliers, countries of operation and logistics.
Example To gain insight into its upstream supply chain, a tier-1 supplier to the automotive industry used an analytics tool for two months to analyze its past contracts, BOMs, and audit data. He then refined his vendor qualification and contracting template to have structured data in the future. The company also customized its supplier portal to better understand its supply chain and risks, focusing on factors such as the origin of parts, volume commitments and inventory levels. These initiatives highlighted individual sources of inputs much further upstream in the supply chain. In particular, most of the metal parts of the company’s products relied on steel from a specific factory.
Pdf) Supply Chain Risk Assessment Approach For Process Quality Risks
Companies face risks at the supplier, industry and geographic levels. has identified over 30 types of risks. Exhibit 2 highlights some of them. They range from insolvency, natural disasters and imbalances between supply and demand to human rights violations, wars and regional agglomeration. Trying to account for all possible risks can lead to excessive analysis and mitigation efforts, leading to disappointing results, especially in the early stages of risk management.
Instead, companies should identify risks that pose a significant risk to the business and prioritize them for monitoring. Key stakeholders in business functions should define their most critical risks based on their needs, core activities and success factors. Prioritization should be reviewed regularly in light of changing circumstances, such as reports of supply disruptions for a particular raw material. Digital tools can assist this process and provide a rationale for risk prioritization.
Example An automotive OEM conducted a detailed real-time risk assessment for semiconductors, extending upstream to the foundry. He also developed a system to monitor the insolvency risk of SMEs upstream in the supply chain. In addition, it tracked long transport routes with the help of third-party data providers. The company paid less attention to other risks, monitoring them through news alerts, supplier audits or quarterly reviews.
Developing A Logistics Risk Assessment Tool
Buying market reports today is not appropriate, because they are usually neither up-to-date nor specific enough. In response, some companies have adopted off-the-shelf digital real-time risk management tools such as real-time dashboards and digital twin control towers. However, even standard modern solutions do not meet a company’s specific challenges in terms of data availability, pain points and business needs. When these tools fail to predict supply disruptions, companies typically use a crisis task force. But this reactive approach is far less effective than proactive measures based on accurate predictions.
A more effective approach is for companies to determine which inputs are most relevant to their particular risks. For example, the risk of supplier default may depend on revenue, profit, level of equity or debt financing, interest rates, dependence on raw materials and energy, and price developments. Furthermore, our analyzes show a strong correlation between supplier default risk and quality problems. Quality can be monitored using the operational metric of “parts per million” (PPM), which measures the rate of defects. In contrast, human rights risk may be correlated with postcode area crime rates, company size, type of legal entity and UN classification of country of origin.
It is important to use customizable tools to analyze your company’s data and assess the risks associated with its inputs.
Supply Chain Risk Management: Enhancing Resilience Through Control Towers
Digital tools, including AI, can help calculate risk algorithms that apply to the most relevant data and provide the necessary user interface and aggregation capabilities. It is important to use customizable tools that can be modified to analyze the company’s existing data and assess the risks associated with the most important inputs.
Example A global brewery was able to predict glass shortages by analyzing risk-related data. The risk management team analyzed and forecast demand and supply trends for key input factors in the cast glass vial value chain. The analysis revealed significant supply risks caused by rising prices for raw materials such as soda ash, industrial sand and limestone, which together account for approximately one-third of production costs. Armed with this risk awareness and price forecasts, the company’s purchasing function planned and implemented measures to mitigate the subsequent increase in glass bottle prices. These measures included stockpiling, long-term contracts and finding alternative suppliers with lower risk.
Similarly, the brewery is constantly monitoring risks in other important material categories – for example, natural gas and malting barley prices are rising due to the conflict in Ukraine. Using scenario planning and AI-enhanced planning tools can help quickly mitigate the impact of supply chain disruptions, thereby strengthening business resilience in the long term.
Verify Inc., A Global Leader In Supply Chain Risk Management
Managing supplier risk requires a range of resources and skills, including strategy synthesis, risk identification, data processing and mitigation development. Although all business units, including procurement, need these capabilities, they are often not fully developed.
To address the capability gap, the risk management function should be integrated into the overall business to understand the needs and operating environment. Cooperation with procurement is essential. For example, risk experts can assign risk scores to each procurement decision, providing reports to management and category managers. He could then design mitigation measures and plan their implementation with key stakeholders such as R&D and manufacturing departments. Procurement and risk teams should also work closely with suppliers to identify and respond to risks.
Example An internal combustion engine manufacturer was concerned about the risk of suppliers leaving the internal combustion engine segment. To mitigate this risk, the company has integrated the research and development function into a risk group of procurement specialists. This team ensures continuous reporting across the organization to board level. He also conducts frequent risk mitigation reviews with business units and holds “risk agreements” with suppliers to discuss risk assessment and mitigation.
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Today’s supply chains are global and complex, giving companies access to vast resources, but also putting them at risk around the world. The procurement function must meet the challenges of identifying and mitigating risk. By working together
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