Why You Must Prioritize Supply Chain Risk Assessment in 2024

It has been more than 3 years since the COVID-19 pandemic first hit and disrupted health infrastructure as well as the economic and business landscape.

But the aftershocks can still be felt keenly across many organizations, particularly in their supply chain operations.

If businesses have learnt one lesson from unforeseen events in recent times, it is the need to foresee risks and prepare for them beforehand.

By anticipating and assessing risks, they can identify potential threats to their supply chains and take steps to mitigate their impact.

As things stand today, uncertainty has gripped several industries amid rising instances of geopolitical conflicts, supply chain disruptions and economic slowdown. Growing uncertainty is driving business leaders to adopt a more proactive approach to risk management.

In many ways, their ability to succeed in a fast-changing business landscape depends on how accurately they can anticipate (and safeguard against) potential threats.

Lack of Visibility Enhances Risk

Lack of visibility beyond tier 1 suppliers has aggravated the problems for businesses in an uncertain and volatile environment. In many cases, businesses do not know their tier 2 and lower-tier suppliers, even for critical supplies.

For a long time now, companies have had the ability to monitor their direct, first-tier suppliers that provide finished products or component assemblies for end-products. However, in the disruption-prone new normal, such a limited visibility of the supply chain is no longer sufficient.

Instead, companies today need complete visibility and multilevel insights into the status of their suppliers’ suppliers.

Among other things, this requires buy-in from tier 1 suppliers who may not be willing to share their vendors’ information for fear of being disintermediated, says Willy Shih, the Robert and Jane Cizik Professor of Management Practice in Business Administration at Harvard Business School in this HBR report.

How should businesses proceed in identifying risks down to the lowest level of their supply chain?

How Supply Chain Mapping Can Help

Identifying risks requires complete supply chain visibility. What is visible is also trackable across various stages of the supply chain.

As a first step to achieving end-to-end supply chain visibility , businesses should map out their supplier network across different tiers. They should work closely with tier 1 suppliers and educate them of the need to share information about their vendors to map out risks.

In the mapping exercise, they should determine priority suppliers based on their importance to the product. Identify materials that are critical to product development and vendors that supply these materials. Also, check where most money is spent in the supply chain.

After identifying the suppliers and other stakeholders, determine their relationships and interdependencies. Check what each stakeholder sells to whom or buys from where. This information can help to get a complete view of the supply chain.

Once mapping is done, companies can regularly communicate with their lower-tier suppliers to ensure they have adequate supplies.

Additionally, supply chain mapping should be an ongoing activity, as businesses need to continuously update their supply chain map as per any additional information or changes in their supply base.

Also Read: Why You Must Invest in Supply Chain Mapping

Increasing Cross-functional Collaboration to Mitigate Risks

Risk management is not merely the responsibility of supply chain and procurement teams. In fact, most companies today understand that all business functions play a vital role in this process.

Effective risk assessment requires increased collaboration between supply chain and business stakeholders. By bringing together different stakeholders such as business executives, production managers, logistics officials, supply chain and procurement teams, as well as external partners, businesses can get a macro view of operations, closely monitor performance and align decisions with changing conditions.

The bottom line is that all functions must play an active role in risk management.

Germany-based Bayer AG, for example, has brought together representatives from different functions into an independent council that focuses on enterprise risk management. The council works in tandem with other internal councils to assess several risks associated with individual suppliers. It shares this information with executives of different business units who then take a final call on accepting these risks associated with each vendor.

Comprehensive Risk Assessment is the Need of the Hour

New and emerging threats have meant that risk assessment must be comprehensive and ongoing. In addition to supply- and disruption-related risks, businesses also need to actively monitor suppliers for social and environmental compliance. All of this has expanded the scope of supply chain risk assessment.

“The definition of risk is changing,” says Alexis Bateman, research scientist and director at the Massachusetts Institute of Technology’s sustainable supply chains program in the same HBR report. “Historically, organizations were focused primarily on measures to avoid business disruption and on being more flexible. Now there are additional factors that expose companies to risk as environmental and social attributes come under closer scrutiny,” she adds.

Do suppliers have a sustainability program in place? What steps are they taking to lower and monitor their emissions? Does their workplace offer a safe and healthy work environment? These are just some of the many things businesses need to increasingly consider to comprehensively evaluate supply chain risks.