What Is Supply Chain Risk Management and Why Is It Important?

Most of the world’s most sophisticated products—including those in the technology, automotive, and biomedical sectors—require the sourcing and procurement of thousands of individual parts, many of which come from all sectors of the globe. These sprawling supply chains not only help save costs–they also help companies maximize access to resources and labor. It’s a level of specialization that would make Adam Smith proud. 

But these sophisticated supply chains are as fragile as they are complex. In the wake of the product shortages caused by the COVID-19 pandemic, companies are scrambling to not only understand the scope of risk their current supply chains create but also how to mitigate it. 

Fortunately, these costly interruptions and exposures can be limited—and, in some cases, prevented entirely—through supply chain risk management (SCRM). But what is SCRM, and how will it help?

What Is Supply Chain Risk Management?

Broadly speaking, supply chain risk management is the process by which businesses deploy strategic measures and processes with the explicit goal of identifying, evaluating, and mitigating risks along their respective supply chains. 

In order to successfully implement supply chain risk management strategies, companies often carry out risk assessments to understand both more commonplace threats and those that are rarer but which bear the potential to exact exceptionally high costs. While supply chain risk management strategies are largely preventative, they also serve the function of building resilience throughout supplier networks—a concept sometimes referred to as “supply chain resilience”—by allowing companies to maintain supply chain continuity in the face of disruptive, unforeseeable events. 

Supply chain risk management strategies typically focus on areas such as logistics, cybersecurity, and visibility and transparency technology, including risk intelligence platforms. While the chief objective of SCRM is to help businesses mitigate and minimize supply chain disruptions, the discipline also works to strengthen relationships with suppliers, bolster compliance, and establish and enforce ethical standards both internally and externally. 

Why Is SCRM Important? 

Employing supply chain risk management strategies is such an indispensable part of doing business today because it gives companies the tools, tactics, and technologies to effectively manage the complex, international networks that comprise modern supply chains. With SCRM, enterprises are able to recognize choke points and other vulnerabilities, implement processes to reduce risk, and develop sophisticated contingency plans when unavoidable scenarios arise that compromise their regular operations. 

When companies implement supply chain risk management, they dramatically reduce the number of costly disruptions they’re forced to contend with. This all but inevitably results in a more streamlined business with less harmful volatility and wider, more reliable profit margins. After all, the costs of ruptured continuity within a company’s supply chain are not hypothetical. In 2020, The Economist Intelligence Unit (EIU) surveyed hundreds of supply chain executives across multiple sectors in the US and Europe and found that supply chain disruptions cost companies an average of between 6-10% of annual revenue. (While these figures may have been partially influenced by the shockwaves of the Covid-19 pandemic, substantial financial burdens predated the supply chain chaos unleashed by the coronavirus.) Companies that take the time to understand the specific risks inherent in their sector and invest in the supply chain risk management strategies to counter them will be protecting themselves against damaging incursions to their time and money. 

While the financial costs associated with supply chain interruptions may be the strongest argument for SCRM, it’s hardly the only one anymore. Companies that suffer issues along their supply chains are also leaving themselves vulnerable to serious reputational risk. When businesses fail to consistently deliver their goods—whatever the extenuating circumstances or degree of responsibility they bear—they endanger their brand in the eyes of their customers. Recurring supply chain issues can leave customers disillusioned and more likely to seek out competitors who can better meet their needs going forward. 

While these reputational effects are harder to precisely quantify than the immediate loss of revenue triggered by supply chain disruptions, they may be even more ruinous in the long run. As the EIU explained in its summary of the 2020 report, “firms were as likely to report damage to brand reputation as a consequence of supply-chain disruption as increased costs of operations.” Simply put, enterprises that secure their supply chain through the thorough implementation of supply chain risk management strategies are protecting not only their product but their relationship with customers and standing in their industry. 

Understanding the Risks that Impact the Supply Chain 

If you’re going to gauge risks and incorporate targeted supply chain risk management strategies to mitigate them, you need to have some understanding of what those risks look like. Today’s supply chain risk landscape includes an array of longstanding threats that may never be permanently eradicated, as well as two emerging concerns that are emblematic of the double-edged sword rapid technological advancement represents in the world of logistics. 

1. Fluctuations in Demand

Demand uncertainties are a timeless source of exasperation for companies and their suppliers. Sudden, unexpected swings in demand for a particular product can leave supply chains reeling as they struggle to adapt. While businesses can examine year-over-year purchasing trajectories and do their best to accurately anticipate the level of consumer demand in any given period, there will always be a constellation of factors that remain outside their control and the scope of the data at their disposal. These include novel competition in the marketplace, unforeseeable trends among consumers, and even regulatory shifts that reverberate across specific industries. 

2. Weather Events and Natural Disasters

While this may sound amusingly old-fashioned in an era dominated by AI, data analytics, predictive modeling, and other transformational technologies, the forces of nature continue to exert an immense degree of influence over global supply chains in 2023. One of the most oft-cited recent examples of this is the megaship Ever Given, which was trapped in the middle of the Suez Canal in March 2021 after strong winds buffeted it sideways and forced the bow and stern to run aground on opposite sides of the canal. During the time that it was stranded—nearly a week in total—the Ever Given was holding up an estimated $9.6 billion in goods every day. 

According to The CDP, an international nonprofit focused on helping companies disclose their environmental impact, the costs of environmental risks to the supply chain—including extreme weather—could reach $120 billion by 2026. In other words, the threat is something businesses must continue to account for. Many projections suggest, in fact, that the effects of climate change will only amplify the collective impact of weather events and natural disasters on global supply chains in the years and decades to come. 

3. Geopolitical Conflict 

Though not quite as unpredictable as extreme weather, tensions, conflicts, and trade wars between nations can have a substantial negative impact on supply chain continuity. The effects of the Russia-Ukraine war, for example, have been felt across a range of disparate industries. While ample media attention has been devoted to the way the conflict has stymied Ukraine’s export of grain and other agricultural products—thus hampering the supply chains that depend on these goods—less discussed is the fact that Ukraine supplies roughly 50% of the world’s neon, a critical component in semiconductor manufacturing. 

The invasion of Ukraine stands as an object lesson in how 21st century armed conflicts have multidimensional effects on highly globalized supply chains. 

4. Cybersecurity Threats

A rising concern for companies navigating complex supply chains with multiple supplier tiers is the possibility that one of those stakeholders will be exposed to a malware attack, data leak, or other variety of cyberattack. While larger organizations typically have sophisticated cybersecurity systems, smaller operations, including third parties and lower-tier suppliers, may not be similarly equipped to defend themselves.

Having a thorough understanding of the security profiles of all actors in your supply chain—including sub-tier entities—is a key facet of supply chain risk management. 

5. Hardware Dependencies

The lengthy, costly, and all-pervasive semiconductor shortage that spanned much of the pandemic era and has yet to fully abate is an illustrative example of how major dependencies on specific technologies can snarl supply chains. Because so many companies across a myriad of sectors were reliant on just a handful of global semiconductor manufacturers, seemingly localized issues had global ramifications with revenue losses in the hundreds of billions of dollars. 

The short-term effects, from an economic perspective, were undoubtedly brutal. In the longer term, however, the shortage did spur numerous Western nations to invest in revitalizing their domestic semiconductor industries. The lesson, it would seem, is that while the need for some technologies cannot be reduced—let alone circumvented altogether—deepening and diversifying the supply chains for these products can reduce the chances of disastrous disruptions. 

Supply Chain Risk Management Strategies—the PPRR Model 

There are any number of supply chain risk management strategies companies can implement to strengthen their defenses against disruptions—stress-testing, supply chain modeling, multi-sourcing. But arguably the most important, and certainly the one applicable to the widest variety of sectors, is the PPRR model. Employed by businesses around the world, PPRR is a useful and all-encompassing strategic roadmap for risk management in supply chains. 

• Prevention: This step involves developing and carrying out precautionary measures to reduce the chances that disruptions materialize along the supply chain. 
• Preparedness: Preventative strategies are never foolproof. For companies dependent on large, multifaceted supply chains, the realization of certain risks is inevitable. All businesses should have a clear and detailed contingency plan that outlines a chain of command and various emergency processes. 
• Response: When complications do arise, companies must respond by executing on the aforementioned contingency plan(s) with efficiency and expediency. Arguably the most important facet of the PPRR model, how a company responds in the midst of a supply chain crisis often determines the degree of financial and reputational fallout.
• Recovery: This refers to the post-disruption phase, with the goal of resuming normal operational capacity quickly and with minimal lingering effects. 

SCRM Technologies 

Assessing and mitigating risks in the supply chain requires enterprises to have far-reaching visibility, comprehensive and up-to-date data, and the ability to analyze materials and components at a granular level. These capabilities are only possible with leading-edge supply chain technology, including SCRM software, risk intelligence platforms, and compliance solutions. At their best, these products serve as powerful, centralized hubs for all the data and insights a company could possibly need regarding its suppliers, components, and subtier manufacturers. 

If information provides one of the most potent countermeasures to supply chain risk, then SCRM software is arguably the most effective defense—and offense—against any of the numberless potential disruptions that can bedevil even the most diligent and judicious firms.