It’s been reported that Walmart works with over 100,000 suppliers all over the world. They are the apex of the modern complex supply chain. Developments such as the internet and globalization have decreased costs, but greatly increased complexity. Consequently, the more complex a supply chain is the more ways it could fail, leading to a standstill in production. How does a giant like Walmart manage all 100,000 plus suppliers with seemingly minimal complications? They use a systematic approach of supply chain risk management to identify their risks before they become problems.
Supply chain risk management (SCRM) can be best described as the process of identifying potential threats and taking steps to prevent and/or limit the impact. It can be broken down into these four stages.
- Risk Identification
- Risk Assessment
- Risk Treatment
- Risk Monitoring
The first step is to determine your known risks. This includes anything capable of being identified and measured. For example, you can measure the reliability of your suppliers and distinguish the risk of them being late or going bankrupt. A reliable way to detect your risks is through data gathered by an ERP system. An ERP system (such as Acumatica or Sage 100cloud) provides you with consistent, up-to-date information, allowing you to identify your risks before they become problems. It is important to have KPIs defined around your supply chain that you can use during Risk Monitoring. Examples would be on-time delivery or fulfillment rate. (Learn more about how to choose the right KPIs here.)
Once the risks are identified, they should be assessed and scored based on their probability of emerging, impact on the supply chain, and the overall prior preparation for the risk. Every company is different, so the framework for evaluating the risks may be unique to each. It’s most important that every risk is appraised with the same criteria. With every risk scored, you can identify your highest risks, and help yourself understand which ones need the most attention.
The next step is to create a unique plan designed to prepare or prevent the risk. Preparing for a risk can be described as risk reduction: a company may attempt to reduce the probability, or the impact, of the risk. For example, if oceans have been more unruly leading to more cargo lost, a company may invest in better quality cargo shipping to reduce the risk. In some cases where a risk is scored high enough it may be beneficial to avoid it entirely. For instance, preventing a risk could consist of switching to a completely different supplier, or changing shipping methods from sea to air. Every problem is unique and requires an individual plan to fix it.
The final step in risk management is monitoring your risks and alterations. Comparing supplier performance against industry benchmarks and current KPIs allows you to monitor and make changes as necessary to improve the supply chain. Maintaining constant supervision of all your risks is essential, as they can change. Once again, the data gathered by an ERP system can be extremely beneficial in monitoring your risks, and the impact of your alterations. Lastly, you can use the information gathered to assess your ability to identify risks and use it to improve your whole process.
If you’re interested in learning more about how your company can utilize ERP to manage risk, get to know Kissinger Associates. For decades, we have helped growing companies in manufacturing and distribution to leverage solutions built for them. Get to know more about the team and contact us for a free consultation.