The process of recognising, evaluating, and controlling risks resulting from operational factors and making decisions that strike a balance between risk and compensating benefits is known as risk management. It is a methodical methodology used to recognise, assess, and minimise the likelihood of a poor departure from an anticipated result.
As businesses lose millions of dollars due to supply disruption, cost volatility, non-compliance fines, and incidents that harm the organisational brand and reputation, supply chain risk management is becoming a major procurement priority. Your company could lose tens of millions of dollars in revenue and hundreds of millions of dollars due to all the following issues. While name brands may be the only ones with a strong reputation, cost volatility and supply disruptions are a problem for all producers.
Stats and facts
According to data from the Business Continuity Institute, supply chain interruptions now rank twice as high in importance as other business disruptions (48% of firms are concerned or extremely concerned). In the same study, 14% of companies experienced supply chain disruption losses that totalled more than €1 million.
Concerning Supply Disruptions
Any unplanned event that disrupts the regular flow of goods and materials in a supply chain is defined by business experts as a supply disruption. The management of operations may be severely harmed by such interruptions. For instance, they may lead to production halts, reduced productivity, and underutilised capacity.
Long-term supply disruptions may have a detrimental impact on a company’s stock price and financial performance. A supply disruption for a purchasing organisation might also indicate an inability to meet demand and please clients.
Supply interruptions can occur for a variety of reasons, such as physical damage to manufacturing facilities, natural disasters, strikes and labour conflicts, capacity challenges, inventory concerns, inaccurate projections, and delays. And companies can hire the Best Freight Forwarders in USA to reduce the risk.
Identification of Risk
The initial stage in any risk management approach is to identify specific risks. Let’s examine some of the more typical risk factors to take into account:
1. Economic dangers
These dangers can include everything from an unanticipated or unfavourable shift in exchange rates to the bankruptcy of a supplier.
Budget overruns, discovering the limit, positive improvements, and missed milestones necessitating further money are a few instances of financial risks. Financial risks also include unanticipated cost overruns that could be connected to other risk factors like modifications in the scope of work necessary to effectively execute the activity.
2. Schedule risk’s breadth
These are the main hazards that endanger the timeline and are largely the result of inadequate project definition or a badly written statement of work, but as previously said, they can also have an impact on costs.
Natural disasters like hurricanes, fires, or floods can cause schedule adjustments, as can supplier-generated noncompliance problems. When revisions are necessary after the original statement of work (SOW) proves insufficient or when the market drives technological advancements, scope risk may result.
3. Legal dangers
Legal and contractual risks are frequently associated with disputes, conflicting interpretations of contractual responsibilities, or failing to comply with a term or condition. Intellectual property use or abuse can also be viewed as a legal risk, particularly when the threat of patent infringement exists. Laws that are broken can also be included in this category, along with civil lawsuits.
4. Risk in the environment
It is crucial to assess the risk to the environment posed by your supplier or contractor while procuring. The organization’s negative effects on water, air, and soil as a result of discharges, emissions, and other types of waste are included in the environmental risk.
5. The peril of politics
Many established institutions find it challenging to adjust when the regulatory environment shifts in reaction to a new administration or growing awareness of social injustices. The effects of these changes on the culture and company operations in that setting must be taken into account while doing sourcing, particularly in low-cost nations. Costs are associated with stability.
6. Organizational project risk
These typically occur as a result of the incorrect personnel or equipment being present at the incorrect time or location. This could also be viewed as a planning risk.
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7. Risk due to human behaviour
Human behaviour hazards are the most challenging to evaluate (ER, 2020), which is not surprising. A project or operation may occasionally be jeopardised by an illness, an accident, the departure of key staff, etc (Rodriguez, 2019). It might occasionally be the outcome of faulty judgments or poor judgement.
Along with the previously mentioned categories, our assessment should specify whether the risks under consideration are internal (related to our own operations) or external (related to circumstances outside of our organisation), such as market factors, political climate, regulatory environment, economic circumstances, etc. More particularly:
- Internal hazards are dangers that you can affect or control. They include of product design, staffing arrangements, timetable modifications, and cost projections.
- Risks that are outside of your control or influence as a contract manager are known as external risks. External risks include governmental acts including taxes that might have an impact on a financial contract, delays in construction that might have an impact on the value of an international contract, and changes in exchange rates.
Conclusion
By being aware of supply risks, purchasing organisations can respond to them in a way that is successful. The management of risks should be a crucial component of ethical supply and procurement practises. It’s crucial to handle the appropriate risks and employ the appropriate tactics.
You may find it helpful to use a variety of methods and resources to help you recognise dangers. Process improvement, buffer measures, building strategic alliances, and developing suppliers are some examples of supply risk management initiatives. We’ll share the best strategies for effectively managing all potential procurement risks in our upcoming article.
References
eazyresearchwp (2020). How to Make Progress on Your Goals When You Feel Unmotivated? https://eazyresearch.com/blog/how-to-make-progress-on-your-goals-when-you-feel-unmotivated/
Daryna Rodriguez (2019). 7 Basic Types of Supply Chain Risks. https://precoro.com/blog/7-basic-types-of-supply-chain-risks/
