An Overview of Supply Chain Risk Management
When the global supply chains are disrupted, organizational operations suffer. Supply chain risk management is imperative to ensure competitiveness.
In this article, we will:
- Explore supply chain preparedness
- Define supply chain management risks
- Discuss IKEA’s supply chain management practices
- Advise how organizations can reduce their supply chain risk
- Reveal McDonald’s Secret sauce for supply chain
- Innovate supply chain management in the global marketplace
Global trade has significantly grown, and so has the marketplace. While there are positives of this, the downside is the vulnerability that can be tracked down the supply chains. Some companies are just better prepared while others are not!
Companies that have developed supply chain risk management strategies are ready to mitigate the impact. Diversifying supply chains from a geographic perspective reduces the supply-side risks, and multi-sourcing commodities can reduce reliance on the suppliers.
This leads to a better preparedness to deal with the issue as it may arise.
Some companies have developed their systems by establishing relationships with key suppliers. Having visibility of the extended supply chain leads to a better understanding of risks and thereby drives priority-based actions.
Their agile production and distribution networks reconfigure the systems to effectively meet the global supply. Along with this, supply chain planning entails a better response and can predict supply chain issues beforehand.
However, companies without a supply chain risk management strategy lack the visibility to foresee the risks in their extended supply chain.
The lack of systems to understand the inventory status, non-optimized production, and lack of flexible networks make them highly exposed to risks that can sever their operations.
Responding to the Immediate Challenge
Recently, the speed and intensity of operations have called for the need to have resilient supply chain solutions. With more interconnectedness, digital technology, and cloud setups, there is an elevated risk of organizations being vulnerable through their supply chains.
Unknown targets can gain access to organizations through partners, vendors, and third parties in the supply chain. This has resulted in supply chain risk management being a crucial part of the organizational risk management strategy.
This article covers supply chain risk management and how organizations can ensure their protection and reduce their vulnerability.
Upgrade Your Existing Technology for Supply Chain Management
Upgrading your technology can help you combat the risks pertinent to the supply chain as a supply chain manager. Here’s how smarter supply chains can help:
- By reducing operational silos and responding to market fluctuations, smarter supply chains drive agility and resiliency for a sustained business.
- Enabling real-time recommendations based on actionable insights that provide you with transparency and visibility.
- The cost, time, and risk associated with having new suppliers onboard are reduced. Supplier onboarding and collaboration are much easier.
3 Supply Chain Risk Management Examples
1: IKEA’s Supply Chain – The Best Kept Secret
IKEA, the largest retailer of home furnishing has a presence in over 50 countries with 445 stores at the midway point of 2020. This instills a longing to know the secrets behind the supply chain management processes of the company.
Ranking at number 40 on Forbes’ World’s Most Valuable brands list for 2020, the company has come a long way in its 78 years of existence.
It doesn't only provide high-quality affordable furniture to its customers around the globe, it has also made its mark in the management world through its unique supply chain and inventory management techniques.
Did you know that each store holds 9500 products? It’s intriguing that IKEA has so much to offer while keeping low prices and still keeping the stock. Let’s learn how!
Source: IKEA
A: IKEA's Vision: An Efficient SCM
IKEA is very clear on its vision – provision of functional and well-designed home furnishings at such economical prices that are affordable. The company distinguishes itself through a year-long product catalog at an agreed price.
B: Furniture with Cost Savings
IKEA sticks to a strategy of low costs. The requirements for various production and manufacturing functions are strict, with a focus on efficient production and distribution as well as sustainability.
Source: IKEA
In research by The Times of London, it was found that more than 50% of IKEA’s products are produced from sustainable raw materials. The company adheres to minimal material usage for furniture production, without compromising the product quality. This results in lower transportation costs because there is lesser usage of fuel and human resource to ship and receive the products.
C: Sustainable Relationships with Suppliers
IKEA’s success can be attributed to a singular factor: communications and relationship management. Establishing sustainable relationships with the suppliers is what distinguishes the company from its counterparts, and this is why it is able to get good prices for the procured materials.
Being a very high-volume retailer, IKEA has more than 1800 suppliers in 50 countries. To manage supplier relations, it has 42 trading offices. These offices play a crucial role: negotiating prices with the retailers, checking material quality, and keeping the social and working conditions in check.
The company fosters competition amongst its suppliers to attain high-quality materials at the best available prices. It also has long-lasting commitments with its suppliers through long-term contracts, which further lowers the prices.
D: IKEA Way of Purchasing
For instance, there’s an IKEA manual, the IKEA Way of Purchasing Home Furnishing Products. It contains the requirements that need to be followed by the manufacturers for reducing the environmental impact of their activities.
The adherence requirements establish high standards through the development of sustainable business activities which leaves a positive impact on the functional environment for all actors within the supply chain.
This is also a testament to the company’s vision of low prices without environmental cost. The company believes in bringing low-priced products to its customers without compromising its business principles.
Following the footsteps
Take a cue from IKEA to see what you can include in your own inventory management practices and SCM strategy.
Through the mix of the right tools for systemizing and automating workflows, you can leverage productivity levels as well as profitability.
IKEA is a prime example of how digital technologies can help businesses manage a highly complex network of operations in an economical, faster manner, and with less labor.
Click here for more on IKEA's strategy
2: L’Oréal Smarter Supply Chains - Ready for Tomorrow
L’Oreal operates by the motto ‘ready for tomorrow.’ The lead for Standards & Prospective Process Improvement, François-Régis Le Tourneau has been managing things in light of better supply chain management practices.
At the Supply Chain Global Summit 2018, he discussed how Industry 4.0, digitization, and the company’s business approach have enabled the company to become Supply Chains to Admire winner for a period of four years in a row. L'Oreal currently ranks 9th on Gartner's top supply chains in 2021.
Source: Gartner
L’Oréal emphasizes its customers through embracing globalization, and this case study is an excellent example of a customer-centric supply chain.
The company works by acquiring local and regional brands and upscaling them to a global level.
A customer-centric agile supply chain strategy is used for meeting customer needs: agile is the capability of delivering the same service and product quality irrespective of demand and supply volatility.
A: Digital is the new Green
There are anticipations about the shifts in demand, and this has led the company to develop an increasingly digital focus.
For instance, the company recorded 40% of sales through ecommerce in China. There’s been an increase of 34% in the global company sales and it is growing.
This has led to a transformation in the company’s way of conducting business. L’Oreal has a digital ad spend of 38%, which helps it to reach the right markets, and is achieved through close collaboration between the supply chain and digital marketing teams.
Source: L’Oréal’s Supply Chain
B: The Customer is at the Center
L’Oréal incorporates customer sentiment in its strategy for retaining an acute focus on the customer. Sensing customer preferences helps it adjust its portfolio for delivering personalized products all around the globe.
This has resulted in hyper-connectivity with the end-user. The company has also developed a model of assessing the environmental impact of its product launches for addressing the concerns of eco-friendly customers.
3: McDonald’s Supply Chain - The Secret Sauce
In 2018 Mcdonald's was promoted to Gartner’s master category for the top supply chains, it joined Apple, Amazon, and P&G in the category.
With sustainability-driven efforts, McDonald’s has revolutionized all parts of its operations: from raw materials to food to packaging, everything is sourced through sustainable means.
Risk identification is only the start: ensuring a sustainable supply chain calls for the need of having verified products and mapping of the whole supply chain.
Source: The Greening of McDonald’s Supply Chain
A: How does McDonald's do that?
McDonald’s, as a bulk beef buyer, is raising sustainable beef supply and is known as the leading champion at the Global Roundtable on Sustainable Beef.
McDonald’s does this through an integrated supply chain which does the following:
- Prioritizes of resources
- Risk identification and concerns of sustainability
- Identification of new opportunities for better leverage
- Improving engagement with supply chain partners
The company has a deep-rooted culture for long-term relationships that results in a win-win situation for suppliers.
The company’s founder Ray Kroc developed a culture based on trust and loyalty with its business partners ever since its inception that has resulted in massive success today.
Source: McDonald’s Supply Chain Management
B: The System Philosophy
The system philosophy by Kroc can be said to be a three-legged tool. McDonald’s employees are one leg, the restaurant owners/operators are the second leg, and the suppliers are the third leg of the stool.
The company is only as strong as its three legs: all of them combined support the company’s weight, that is the suppliers, employees, and franchisees.
It was believed that if the suppliers and restaurant owners/operators were successful, the company would be successful. That said, McDonald’s, its suppliers, and restaurant owners/operators help each other succeed. The system only prospers if each one prospers!
Suppliers are driven to innovate through the long-term vision, and it's the innovation that helps McDonald’s have a better cost structure than its counterparts.
Accept that Management is Essential
Effective and efficient supply chains are integral for company success. Globalization has led to the development of complex supply chains, and their integration makes them increasingly vulnerable to risks.
There has been a long focus on optimization of the supply chain for cost minimization, reduction in inventory, asset maximization, and flexibility. COVID-19 is an example of how a lot of companies might lack the vision to assess their vulnerability to global disruptions in their supply chain relationships.
Fortunately, there are new supply chain technologies that can lead to drastic improvements in the end to end supply chain management, leading to agile and resilient supply chains.
The conventional supply chain view is transformed into digital supply networks. This results in the breakdown of functional silos where you are fully integrated with your supply network.
There is end-to-end visibility, agility, responsiveness, and collaboration. These digital supply networks are now increasingly developed for identification and anticipation of disruptions so the organizations can be better prepared to adapt and pivot when required.
How Organizations Can Reduce Their Supply Chain Risk
Follow these six simple yet vital steps to significantly reduce your Supply Chain risk.
1: Know Your Threat
Nation-state actors are constantly targeting companies, looking to steal IP, target companies who work with governments, or make their way in a company until they can either take down the network or siphon off information until they’re caught. These bad actors can leverage many of the risks detailed above or leverage multiple risk factors in order to attack a company’s third parties.
Source: Supply Chain Risks
2: Understand Each Supply Chain’s Risk Profile
Your organization’s capability to communicate can be impacted if you have one supplier, but you can still rely on other forms of communication if there are more. In such a situation, it won’t affect your business services.
However, if your cloud service provider is attacked and brought down, that may affect your website, your data, and your customers’ data, severely affecting your organization’s ability to perform its services.
Source: Big Box
3: Manage Your Vendor’s Integration
If a hacker is specifically targeting your organization and knows your vendor, they may leverage vulnerabilities to try and access important data, lurk in sensitive channels, and even get inside your organization’s network.
Source: Supply Chain Mapping
But if you’ve set up your vendors with security in mind, you can ensure a vendor isn’t providing unnecessary access to your network or data.
📚 Recommended reading: Risk Matrix: How To Use It In Strategic Planning
Successful Supply Chain Risk Management Strategies
Managing your supply chain risk can be complicated, especially compared to securing your own internal systems and environments.
It’s an ongoing effort and should be a consistent part of your overall risk management and cybersecurity strategy. Here are some tactical strategies to consider to protect yourself from supply chain attacks.
4: Understand Your Supply Chain Ecosystem
Not having the right visibility of your supply chain will make managing risk incredibly difficult. You should work cross-functionally with other departments to make sure you have a list of all your supply chain vendors, third parties, and partners.
Source: Supply Chain Ecosystem
From there, identify which of these vendors and partners expose you to the most risk. If attacked, will they impact your organization’s ability to perform or serve your customers? If they’re breached, does that expose your data or network?
5: Limit Your Supply Chain’s Network Access and Integrations
Many hackers and threat actors actively try to reach an organization through their third parties, hoping to evade detection and take advantage of third-party’s poor security.
However, if you have the right network segmentation in place, limit your third-party’s network access, and ensure they are only handling necessary data, you’re limiting the kind of damage a hacker can inflict on your own network.
Source: Integrated Supply Chain
6: Monitor Your Network for any Suspicious Activity
You can’t prevent network access across your entire supply-chain environment, so make sure you have some kind of monitoring and tracking in place.
If one of your supply chain vendors is acting irregularly and perhaps accessing unnecessary data or parts of your network, it may suggest a compromise.
Source: Supply Chain Monitoring Chain Point
The Imperative for a New Supply Chain Model
Coronavirus has inspired businesses to prepare their supply chains for the future. Ideally, supply chain risk management should be considered holistically and be part of an overall risk management framework.
This ensures you’re managing your risk internally and externally and giving your department the best way to handle risks as your company grows internally and leverages any new vendors.
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