What Is Supply Chain Risk Management (SCRM)?

Article Highlights:

• Supply chain risk management (SCRM) is the set of processes, practices, and procedures for identifying and mitigating threats to a business’s supply chain. 
• A 2023 study by supply chain resilience firm Interos found that organizations with annual revenues of at least $500 million were still losing $80 million a year to supply chain disruptions.
• A comprehensive SCRM program should go beyond recognizing and assessing risks associated with suppliers, business partners, and supply chains.
• As McKinsey wrote in a 2023 article on the subject, “After the large-scale disruptions of recent years, supply chain risk has moved from being a niche topic to a top three item on the senior-management agenda.”

What is Supply Chain Risk Management (SCRM)?

Supply chain risk management (SCRM) is the set of processes, practices, and procedures for identifying and mitigating threats to a business’s supply chain. The overarching goal of any supply chain risk management system is to develop and implement preventative measures against potential disruptions to a company’s direct suppliers, sub-tier manufacturers, and broader supply chain continuity.

The overarching goal of any supply chain risk management system is to develop and implement preventative measures against potential disruptions to a company’s direct suppliers, sub-tier manufacturers, and broader supply chain continuity.

According to the National Institute of Standards and Technology (NIST), a government agency focused on advancing American innovation and competitiveness in science and engineering fields, these risks could arise from “the supplier, the supplied product and its subcomponents, or the supply chain (e.g., initial production, packaging, handling, storage, transport, mission operation, and disposal).”

Globalization Has Multiplied Supply Chain Vulnerabilities

Supply chains are more complex than ever. The globalization of trade and manufacturing that accelerated in the 1980s and 1990s connected businesses with suppliers all over the world, and that phenomenon of worldwide interdependence and hyper-specialization has generally continued over the past quarter-century. (Despite the buzzy discourse surrounding onshoring, nearshoring, and deglobalization, trade data doesn’t support a substantive downturn or reversal of international trade, exports, and imports.)  Today, individual products receive dozens or even hundreds of manufacturing inputs at factories and assembly facilities all over the world. One of the chief negative consequences of these exceedingly complex supply chains is that businesses that rely on them for their products and components have a growing number of vulnerabilities and potential points of failure. Organizations with sprawling supplier networks that go three, four, or five tiers down face threats from extreme weather events, trade conflicts, factory shutdowns, and the financial insolvency of individual manufacturers (among other risks). 

Organizations with sprawling supplier networks that go three, four, or five tiers down face threats from extreme weather events, trade conflicts, factory shutdowns, and the financial insolvency of individual manufacturers (among other risks). 

Against this perilous backdrop, supply chain risk management can be thought of as a kind of operational moat. SCRM offers protection against the myriad threats that permeate today’s global supply chains. Effective supply chain risk management strategies can help companies address, neutralize, and defend themselves against this growing legion of challenges. 

Why SCRM Is More Important Than Ever 

The COVID-19 pandemic provided an unnerving encapsulation of the fragility of the global supply chain, and the devastating financial repercussions of that fragility. Supply chain disruptions cost large businesses in key sectors like energy and aerospace an average of over $180 million in both 2020 and 2021. The automotive industry alone suffered losses in the hundreds of billions of dollars during the same timespan. Disruptions and shortages also had a profound impact on the cost of materials. The Producer Price Index indicated that the price of commodities increased a staggering 19 percent from May 2020 to May 2021. This represented the largest such increase in decades. 

And while the magnitude and frequency of supply chain disruptions have eased over the last two years—as coronavirus cases have dwindled and industries returned to normal production levels—there’s also ample evidence suggesting that supply chains will never regain the stability of the pre-pandemic era. 

And while the magnitude and frequency of supply chain disruptions have eased over the last two years, there’s also ample evidence suggesting that supply chains will never regain the stability of the pre-pandemic era. 

A 2023 study by supply chain resilience firm Interos found that organizations with annual revenues of at least $500 million were still losing $80 million a year to supply chain disruptions (including extreme weather events, geopolitical disputes, and cyberattacks). The “Supply Chain Stability Index,” a tool created by the Association for Supply Chain Management (ASCM) and KPMG, meanwhile, further strengthens the case that the supply chain continuity enjoyed prior to the pandemic remains firmly out of reach. “A complete return to pre-pandemic normalcy remains unlikely in 2024,” the organizations wrote. New threats include “closures between U.S. and Mexico trade corridors and rising conflicts leading to commercial ship attacks in the Red Sea.” 

These statistics and expert perspectives speak to the reality that organizations are continuing to encounter elevated risks along their supply chains, and will be navigating these threats for the foreseeable future. This, in brief, is exactly why supply chain risk management is so essential. SCRM helps companies build the strategies and preventative measures that cultivate supply chain resilience and serve as a critical buffer within an increasingly hazardous risk landscape. By developing and implementing supply chain risk management tools, organizations can recognize threats and adapt to them before they transform into chaotic events that complicate logistics and sabotage manufacturing. Through a slew of best practices that encompass contingency planning, risk modeling, data transparency, and advanced intelligence software, SCRM effectively mitigates hazards and minimizes their fallout. 

The Most Critical Supply Chain Risks Today 

The business discipline of supply chain risk management doesn’t focus exclusively on a single threat or variety of disruption. Rather, SCRM is intended to fortify organizations against many of the most prevalent risks embedded within today’s global supply chain. These include:

• Natural disasters and extreme weather events. These include hurricanes, flooding, earthquakes, and heat waves.
• Supplier bankruptcy and other matters of financial health.
• Cyberattacks, data breaches, and other cybersecurity threats.
• Trade compliance. This may include sanctions, export and import controls, and other legal restrictions. 
• Environmental compliance, including emerging regulations in the ESG and sustainability spaces.
• Factory shutdowns.
• Geopolitical issues. Examples include the effects of hot wars, trade conflicts, and terrorist attacks.
• Production capacities and supplier shortages.
• Issues stemming from obsolescence. 

Risks like these can lead to an array of different consequences for manufacturers. There are the financial costs of supply chain disruptions, of course. Losses stemming from these events can easily reach the tens of millions of dollars for large organizations, negatively impacting net revenue and annual earnings. Contrary to the oversimplified, one-dimensional conception many individuals have of supply chain risk, however, these disruptions reverberate beyond a firm’s financials. Companies whose suppliers are out of compliance with government regulations, or who are otherwise running afoul of sustainability standards, may also face reputational damage. 

Losses stemming from these events can easily reach the tens of millions of dollars for large organizations, negatively impacting net revenue and annual earnings.

Recommended Reading: Why Natural Disasters Are Going to Roil Supply Chains Over the Next Decade

These risks were on prominent display recently, when a raft of reporting from major news outlets described how a recent congressional investigation had found ties between top automakers and forced labor. The investigation revealed that several car manufacturers—including BMW and Volkswagen—were importing parts from a Chinese supplier connected to forced labor practices in Xinjiang. Putting the potential financial repercussions of these revelations aside, the fact that these large, brand-name corporations were benefiting from labor exploitation in China bears the potential for serious reputational fallout. (As governments and individual consumers grow increasingly attuned to sustainability standards and ESG measures of corporate performance, transgressions like these will get harder and harder to shake off.)

In addition, disruptions related to sanctions, trade restrictions, and environmental compliance can leave manufacturers facing legal consequences that include fines, penalties, and shipment detainments and seizures. Violating the European Union’s Corporate Sustainability Due Diligence Directive (CS3D), for example—which was officially adopted by the EU in May—could carry a maximum penalty of 5% of a company’s total global revenue. 

The Key Components of an Effective SCRM System 

Companies interested in strengthening their SCRM practices—or incorporating the supply chain risk management tools required to carry out these efforts at the highest levels—have a rapidly growing field to draw from. The best supply chain risk management systems are standardized and methodical, applying the same strictly defined processes to any number of different risks and suppliers. 

The best supply chain risk management systems are standardized and methodical, applying the same strictly defined processes to any number of different risks and suppliers. 

Risk Identification 

As we discussed in detail in our two-part series on supplier risk analysis, the first step to any effective SCRM program is identifying the most prevalent threats to a business’s supply chain. These will almost certainly include universal risks like extreme weather, regulatory compliance, and geopolitical conflict. But they could also include sector-specific disruptions like obsolescence and sub-tier dependencies. 

SCRM Risk Models and Assessments 

Once an organization understands the full scope of risks within their supply chain, they need to develop a risk model to assess those hazards. These models often include a risk matrix, which can help manufacturers evaluate the threat level posed by individual suppliers based on severity and likelihood. After the model has been fully developed, the supply chain risk management tool can be used to analyze and evaluate suppliers, sub-tier manufacturers, potential strategic shifts, and other hypothetical scenarios.  

Recommended Reading: Developing and Implementing a Risk Model for the Semiconductor Supply Chain

SCRM Risk Mitigation Measures

A comprehensive SCRM program should go beyond recognizing and assessing risks associated with suppliers, business partners, and supply chains. In the complex, multilateral risk landscapes enveloping today’s global supply chains, these systems also need to develop and implement preventative measures informed by data and threat assessments. The following strategic practices can insulate companies from disruptions when they do occur and minimize their extensive, multifaceted costs. 

• Multisourcing: A long-established practice in strategic sourcing and supply chain management, multisourcing gives organizations flexibility, agility, and resilience when unexpected complications arise. When manufacturers have alternative suppliers throughout their supply chain, they’re able to respond quickly and efficiently to a wide variety of different disruptions, maintaining continuity and accelerating damage control.

• Nearshoring/Onshoring: This strategy has garnered considerable attention and merit in an era of heightened trade tensions with China and growing political pressure to challenge the status quo of unchecked globalization. Nearshoring and onshoring suppliers can also help U.S. manufacturers avoid the consequences of escalatory trade conflicts and position themselves to gain stronger visibility into their business partners. 

• Supplier Visibility and Data Transparency: Effective SCRM requires organizations to go beyond analyzing data, crunching numbers, and working up risk models. It also entails reaching out to suppliers and other supply chain stakeholders and strengthening communication channels. Only through cultivating relationships in this way can businesses hope to establish the levels of visibility and transparency that are so advantageous to effective risk management. (Supply chain risk management tools can also play an integral role in helping manufacturers achieve greater visibility into their suppliers.)

• Supply Chain Mapping: It’s one of the most logistically challenging tasks a company can carry out to mitigate risk. It’s also—perhaps not coincidentally—an essential strategy for visualizing your supply chain and identifying its chief vulnerabilities. Comprehensive supply chain maps can also help sourcing professionals conceptualize the manufacturing process in a more nuanced, sophisticated way, allowing them to carry out many of the other risk mitigation measures with greater deliberateness and precision. 

• Supply Chain Risk Management Tools: Businesses motivated to ramp up their SCRM system but intimidated by the scale and complexity of the undertaking don’t have to go it alone. Supply chain risk management tools—including leading-edge software and sophisticated platforms—can often serve as crucial all-in-one instruments. These risk solutions are veritable Swiss Army Knives that offer supply chain mapping, compliance management, supplier risk assessments, and vital sub-tier intelligence, among other features. The best supply chain risk management tools even provide risk scores for electronic components, adding yet another dimension to a business’s overall resilience portfolio. 

• Contingency Planning: No matter the industry or field, managing risk effectively requires organizations to have established contingency planning in place when specific situations or disruptions arise. These procedures should be outlined and codified in official company policy, allowing professionals to follow a specific, clearly defined set of guidelines in times of crisis. Such contingency plans also help leaders respond decisively and initiate damage control efforts with maximum proficiency. 

Ongoing Monitoring of Supply Chain Stakeholders 

It’s important for businesses to remember that disruptions—and the operational risks that trigger them—are not fixed, calcified elements of the supply chain. Rather, these threats are dynamic and fluid, constantly subject to a constellation of variables that include everything from climate change and international conflict to government regulations and consumer trends. Because of this inherent changeability, SCRM and all the practices that come with it need to be supplemented and reinforced by ongoing efforts to monitor suppliers and their potential vulnerabilities. A supply chain stakeholder that is assessed as low-risk one year may have a dramatically different risk profile 18 months later. Regularly collecting new data and running fresh risk assessments can keep manufacturers from making strategic, consequential decisions based on obsolete evaluations and intelligence. 

Because of this inherent changeability, SCRM and all the practices that come with it need to be supplemented and reinforced by ongoing efforts to monitor suppliers and their potential vulnerabilities.

The Largest Obstacles to Establishing a Supply Chain Risk Management System

While the advantages of supply chain risk management may be abundantly evident to many businesses and their executive leadership, companies are sometimes slow, apprehensive, or otherwise resistant to adopting SCRM practices. There are often reasons for this that go beyond mere complacency or inertia. 

In some cases, supply chain management professionals are simply overwhelmed by the sheer scale of data required to understand their various suppliers and work up accurate risk assessments on them. Crucial information on stakeholders may prove exceedingly difficult to obtain, and team members may find suppliers less than obliging when it comes to sharing detailed information on sub-tiers, internal practices, and other sensitive intel. In other cases, strategic sourcing experts may struggle to develop effective, objective risk models, or doubt their own judgment when it comes to evaluating factors like severity and likelihood. And perhaps least surprisingly, organizations on a budget may balk at the idea of paying for the expertise, technology, and training necessary to build out a robust SCRM program. 

Such obstacles notwithstanding, the field of supply chain risk management is on an irrefutable growth trajectory. As McKinsey wrote in a 2023 article on the subject, “After the large-scale disruptions of recent years, supply chain risk has moved from being a niche topic to a top three item on the senior-management agenda.” In a world embroiled in armed conflict, asymmetrical, hybrid warfare, simmering trade tensions, and the havoc unleashed by a shifting and increasingly volatile climate, being able to manage risk with efficacy and precision is an invaluable asset to organizations’ continuity. In the years to come, it may yet prove to be imperative to their long-term survival.