Supply Chain Risk Management

Supply chain risk management (SCRM) is the collection of internal practices and processes a business, organization, or other entity engages in to reduce threats along their supply chain. The ultimate goal of all supply chain risk management is to minimize disruptions, whether they come in the form of natural disasters, supply shortages, geopolitical events, or cybersecurity attacks. The National Institute of Standards and Technology (NIST), a government agency focused on advancing American innovation and competitiveness in science and engineering fields, defines the term as a “systematic process for managing supply chain risk by identifying susceptibilities, vulnerabilities, and threats throughout the supply chain and developing mitigation strategies to combat those threats whether presented by the supplier, the supplies product and its subcomponents, or the supply chain.” Over the past decade, as environmental regulations and sanctions programs have expanded throughout the world, SCRM has evolved to address regulatory compliance as well. SCRM professionals use a combination of technological tools and personal expertise to develop a comprehensive grasp of the specific regulatory landscape that applies to their business and industry. This facet of SCRM also entails assessing and mitigating any supply chain stakeholders who are either violating existing directives or are at risk of doing so.

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Why Is Supply Chain Risk Management Important?

Today’s supply chains are extremely complex networks that often feature hundreds of direct suppliers and thousands of sub-tier suppliers (your suppliers’ suppliers, their suppliers, and so on). Because companies rely on so many individual suppliers, manufacturers, logistics companies, and other supply chain stakeholders, they have more vulnerabilities and potential points of failure than ever before. Organizations bound to sprawling supplier networks that go three, four, or five tiers deep face threats from extreme weather events, trade conflicts, factory shutdowns, and the financial insolvency of individual manufacturers (among other risks).

Supply chain risk management is a business discipline that’s been developed with the explicit goal of addressing these dense constellations of risk. SCRM can help companies understand the most salient threats to their operations, identify the riskiest entities in their supply chains, and develop strategies to help cultivate the resilience necessary to effectively absorb disruptions without significantly impacting operations.

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What Is SCRM Software?

SCRM software are platforms that use large databases, experienced research teams, and proprietary technology to aid their customers in identifying and addressing threats along their supply chains. These tools can help organizations mitigate a myriad of different risks with the capacity to disrupt their operations and ultimately erode their bottom line. These solutions accomplish this through a range of functionalities that include detailed threat assessments, comprehensive portfolios of suppliers, product and component data, and powerful supply chain mapping capabilities.

SCRM platform Z2Data, for example, offers customers a wide repertoire of solutions that enable manufacturers to manage their supply chains with maximum visibility and strategic precision. The industry-leading software provides a unified, all-in-one tool for businesses that rely on the electronic component supply chain to manufacture their products.

It’s important to remember, too, that SCRM platforms are more than just vast, undifferentiated data repositories. Information overload and data fragmentation are major concerns in today’s digital environments, and these solutions transcend these pitfalls by providing insightful intelligence that’s carefully contextualized and highly actionable.

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Proactive vs. Reactive SCRM

Historically, most companies have relied on a reactive approach to supply chain risk management—one that’s largely indistinguishable from crisis management. Organizations that practice reactive risk management often have a single point person to handle disruptions as they occur, and are frequently engaged in firefighting efforts. In addition, when companies who use reactive SCRM reach out to suppliers and other supply chain stakeholders in the wake of a major disruption, they lack a predetermined strategy or framework. As a result, their mitigation efforts are disorganized and shortsighted, ultimately costing them time and revenue.

Proactive SCRM, on the other hand, starts with establishing a system for tracking data and maintaining visibility over an organization’s supply chain. Companies that can see their parts and components—a “bottom-up” approach—as well as their suppliers—referred to as “top-down”—are in a much better position to recognize potential risks before they develop into costly disruptions. Once a firm is equipped with this level of visibility into parts, suppliers, and other relevant supply chain data, they’re able to install internal practices and procedures to address existing vulnerabilities. This meticulous, foresighted approach is the antithesis of crisis management, and allows businesses to cultivate the kind of supply chain resilience that leads to market longevity.

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How to Develop a Strong Risk Model

In order to accurately assess the threat level posed by direct and subtier suppliers, businesses need to have a robust risk model to draw from. Also referred to as a risk analysis or risk assessment, a risk model is a framework or set of established criteria for evaluating the vulnerabilities of a specific manufacturer. The most sophisticated risk models often incorporate algorithms and other mathematical calculations to help companies arrive at a precise, objective measure of a potential partner’s risk profile.

These tools are a cornerstone of good supply chain risk management. By developing and implementing risk models, organizations are able to put prospective vendors through a standardized vetting process and gain a comprehensive understanding of how specific historical vulnerabilities could recur in costly ways. Today, there are at least a half-dozen critical supply chain risks that should be incorporated into any comprehensive risk analysis. These include financial health and/or bankruptcy risk; extreme weather and climate-related events; geopolitical concerns; ESG and sustainability; cybersecurity; trade compliance; and data transparency.

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The Importance of Supply Chain Mapping

While supply chain risk management is a multifaceted field with an ever-expanding repertoire of strategies and solutions, there is arguably no tool more important to managing supply chain risk than mapping. As a 2022 paper published in the International Journal of Production Economics put it, “Mapping the supply chain is the first stepping-stone for effective strategic supply chain management.”

Supply chain maps are comprehensive visualizations of a business’s entire value chain. They show everything from direct manufacturers and subtier vendors to manufacturing locations and parts. The specific items and variables within a supply chain map vary between sectors, and may also include raw materials, distribution centers, and diagrammatic representations of the flow of goods.. Why are these visualizations widely considered the bedrock of supply chain risk management? Because they offer the data and visibility that unlocks many of the most critical SCRM strategies. Mapping the supply chain allows organizations to pinpoint and isolate vulnerabilities that would otherwise remain abstract and out of reach.

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SCRM Strategies That Can Backfire

There’s no question that manufacturers and other businesses have taken meaningful strides in implementing SCRM in the years since the COVID-19 pandemic threw light on the fragility of global supply chains. Broadly speaking, the results of this mass adoption have been positive, as firms are reporting a lower frequency of total supply chain impacts. Many of the risk management strategies that have been widely embraced over the past few years, however, come with notable deficiencies.

Increased collaboration with suppliers is one example of this. While the intention is perfectly reasonable—by strengthening relationships with manufacturers, companies will have a more comprehensive grasp of the threats they pose—the approach comes with several inherent flaws. Supplier surveys are static, inert documents that only reflect the operations of your vendor at a single point in time. In addition, the suppliers themselves often don’t have the same priorities as their customers, a misalignment that could lead to underreporting or even deliberate misrepresentation on critical issues like compliance and ESG performance.

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How AI Can Strengthen SCRM

The AI revolution is well underway, as corporations are spending tens of billions of dollars on cutting-edge AI models promising to transform their operations and optimize overall performance. Research over the past few years has suggested that AI adoption has been especially prominent in SCRM, a field where the technology’s data analysis and forecasting prowess are particularly valuable. According to a 2024 survey from Gartner, 40% of high-performing supply chain organizations are utilizing either AI or machine learning (ML) for demand forecasting, and nearly a third are deploying the technology to assist with supply planning.

As these statistics illustrate, artificial intelligence is no longer a hypothetical in the world of SCRM. As we enter the middle of the 2020s, the technology has rapidly established itself as a powerful, practical tool that supply chain professionals can utilize to learn more about their supplier networks and predict future market dynamics. In addition to demand forecasting, risk management teams are drawing on AI software to help them carry out supply chain mapping, develop risk assessments, and identify new and alternative suppliers.