Supply Chain Risks: The 4 Basic Types and How to Avoid Them

by Vector | Oct 7, 2021 2:49:53 PM

The global supply chain is looking a little Rocky these days, isn't it? By Rocky, I mean it looks a bit like Rocky Balboa at the end of a fight. The supply chain is pretty beat up.

It isn't surprising that supply chain risk is stealing a lot of headlines. In fact, supply chain risk is one of my favorite meta stories at this point. After all, almost everything we buy, wear, and eat is part of one supply chain or another. Therefore, if we understand the risks facing the supply chain, we gain a better understanding of the world we live in—and the fabric of modern life.

So today, we're going to take a high-level look at the basic types of supply chain risk.

For supply chain leaders, risk assessment and adaptation come with the job description. In general, there's a lot of what could be described as "staff grit" that has won many a day. But when high-impact and unfamiliar risk events strike—like a pandemic, the Suez crisis, or Brexit—it exposes the supply chain in a different way.

A chain is only as strong as its weakest link, right? Therefore, hopefully the information we cover today will help you identify and avoid risks threatening your own supply chain.

Here are four general sources of supply chain risk that we'll target today:

  1. Environmental
  2. Geopolitical
  3. Economic
  4. Cybersecurity

We'll dissect each area further and identify ways to avoid these risks. But first, let's get some backstory.

How Did the Supply Chain Get so Heavy on Risk?

Supply chain risk is a trending topic in any given week. But how did we get here? It depends on how far back you want to go, but let's start with the pandemic.

In the wake of the pandemic and short-lived 2020 recession, the global economy surged back to life. But supply chains that had been moth-balled during the pandemic suddenly struggled to keep up with a sudden tsunami of demand. What we could broadly define as "transportation issues" around the world led to long delays at ports, increased shipping container costs, increased overall costs, and a surprising sea-change in narratives.

Supply chain leaders are an adaptable bunch. You roll with the punches or get out of the industry. Likewise, I think you could say the global supply chain as a whole has proven pretty resilient over the decades.

But the current story unfolding about supply chain risk concerns cadence. As we cover each topic, don't think of each in its own bubble. This isn't an "either-or" situation, but more "also-and." In short, risk events are hitting aspects of the supply chain with increased frequency. This means that companies and supply chains are unable to recover from the last hit before absorbing the next blow.

Unless you're Rocky Balboa fighting Ivan Drago, we know that after too many consecutive hits, most people eventually hit the canvas.

Environmental Risk

Environmental risk includes any supply chain disruption that results from a natural event. These typically include:

  • extreme weather
  • natural disasters
  • pandemics

We know what an environmental risk looks like. These events own the headlines, depending on the severity of the environmental event. Within one year, North America experienced a record-setting hurricane season, a Texas snowpocalypse, and a Western heat dome. Any one of those events can disrupt a business and any supply chain operating through or in the region.

On the other hand, during the same period, we were of course in the midst of the COVID-19 pandemic. You get the idea. Environmental risks can be local or global. As such, the environmental risk to a supply chain can be mild or severe.

Geopolitical Risks

According to Riskmethods.com, "supply chain geopolitical risk is the possibility that your supply chain is disrupted by global political events. The most obvious and high profile are wars and revolutions, but even the less dramatic can cause serious consequences for businesses."

Possible geopolitical risk events include:

  • political instability or unrest
  • protest movements
  • trade restrictions and tariffs
  • corruption
  • terrorism or pirating

Geopolitical risk varies widely. The spectrum can include a flare-up, impromptu demonstration, or riot like the Arab Spring or storming of the U.S. Capitol. In comparison, tariffs tend to be imposed along somewhat slower narrative lines.

Either way, responding to a new tariff or political event takes effort from your internal resources. And again, we trust our teams to get through any single event. The greater risk occurs when multiple events overlap.

Economic Risks

The next risk factor on our list is economic. Sure, a port delay seems like it should be easier to prepare for than a natural disaster. But the result is the same when it comes to supply chain risk. Here's a list of some common economic supply chain risk factors:

  • demand spikes
  • port and border delays
  • price volatility
  • currency fluctuations
  • material shortages

Here's an example of how economic risk hurts the supply chain. As noted in a recent article on joc.com, record-setting shipping rates after the pandemic are forcing some business to stop shipping. In other words, businesses are "getting priced out of restocking because of high ocean freight rates."

In time, weaker demand for containers may bring prices back down. As you might imagine, high rates are a systemic risk to the supply chain. In the meantime, the list of material shortages is vast, if not somewhat (gallowsy) humorous. Everything from chicken wings, to microchips, to steel tubing has seen delays and supply chain disruptions. Talk about jerk sauce!

We have one more risk to discuss, but first let's take a moment to talk about visibility.

Supply Chain Visibility

One solution to economic risk is to improve supply chain visibility. Visibility encompasses real-time access to shipment tracking, order status, pickups, deliveries, freight claims, on-time performance, and carrier metrics. Beyond that, visibility occurs when suppliers at various tiers of a supply chain share information. In short, visibility improves planning and reactions to risk events.

Visibility must be done the right way. The best and only way to begin the process of digitizing your documents is to work with a trusted digitization software provider, like Vector.

Cybersecurity Risk

We're all only as good as our information. Indeed, the last category we'll cover is cybersecurity risk. Visibility of all tiers involved in your supply chain is great. But no one wants sensitive business information, trade secrets, or intellectual property broadcast across the industry. So there's a balance. That said, these are the types of threat we face from technological risk.

  • ransomware hacks
  • data theft
  • intellectual property theft

Much of the U.S. Eastern seaboard was affected by the Colonial Pipeline hack, which shut down some gasoline supply chains for a week. In the aftermath of that hack, the U.S. Department of Homeland Security (DHS) mandated that pipeline operators enact stringent cybersecurity measures.

How to Avoid Supply Chain Risk? Don't Get Too Lean. Instead, Try Dual Sourcing.

According to Gartner supply chain research, the most effective way to protect your organization against risk is to maintain multiple suppliers in multiple regions. Leaning and streamlining your supply chain has value. But single-sourcing leaves you open to risk.

Lean supply chain methodologies have been very popular for the last few decades. But lean's mandate is defined as, "the focus on the relentless elimination of non-value added time and reduction of lead times at every step of the supply chain from the manufacturing of raw materials by suppliers to the delivery of finished goods to the end user."

In essence, the goal of lean methods doesn't align with supply chain resilience. Lean methods consider dual sources inefficient and a waste! It's like the old saying, "Follow the money." Only I'm suggesting we "follow the money—further."

Two sources are more expensive to maintain than one—in the short term. And let's recognize that lean-minded supply chain managers are incentivized to relentlessly pursue leaner supply chains. They'll earn their salaries and do a good job by single-sourcing. But one person's waste reduction is another person's liability!

As supply chain leaders and policy makers, we must recognize that the post-pandemic supply chain crisis proved lean methods are short-sighted. Single-sourced supply chains are uncreative. They have a great deal of risk for catastrophic revenue impact.

So keep fighting like Rocky, but think critically about supply chain risk.

Remember the Eye of the Tiger!

This post was written by Justin Reynolds. Justin is a freelance writer who enjoys telling stories about how technology, science, and creativity can help workers be more productive. In his spare time, he likes seeing or playing live music, hiking, and traveling.

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