Recipe for Successful Supply Chain Risk Management Ingredient 1: Selection of Relevant Supply Chains

First, define which supply chains to focus on and to include in SCRM. In principle, one of two approaches can be used: Either a) all supply chains or b) a very specific section of the supply chains is monitored. The following parameters can be used and taken into consideration for specifying the section:

Purchasing Volume

According to the Pareto Principle, 20% of the supply chains that make up most (80%) of the purchasing volume can be identified. The intention of this parameter is that all large-scale supply chains are included in the risk radar. In many cases additional parameters are combined with this one, as the purchasing volume alone does not ensure that all critical components or services concentrated on are covered.

Impact on Sales

Besides the purchasing volume, the impact on sales must also be taken into account as a parameter. The idea behind selecting the impact on sales is to capture additional supply chains that may have low purchasing volumes yet impact severely on whether a product or service can be supplied.

Selected Indirect Materials and Services

When taking a closer look at supply chains that impact on sales, many a service that is supposedly quick and easy to substitute turns out to be one that should at least be monitored. Availability of certain indirect materials and services, such as logistics services, machinery, sales materials or IT can certainly impact on the supply, depending on the sector and size of the company.

Technology and Patents

When monitoring risks in supply chains it is also important to take note of technological expertise and the legal situation, and where applicable, even of patent dependencies: Are technologies available that secure a USP for your own products? Patents that force single-source situations or that are necessary for future products or services? In that case, it is important to include these supply chains in the monitoring process as well.

Ownership Structures

Any ownership structures in the organization itself in respect of suppliers or even competitors require that such supplier relationships be included in risk monitoring, where applicable.

Customer Specifications

As supply chains based on customer specifications are not selected using classic decision-making processes, they could contain additional risks when combined with the established supply network. Insolvency risks (“pain-sharing”), performance risks and also quality risks are examples of this.

Region

The background to a region selection is that the focus of risk management activities is on supply chains in unstable local or national environments. The reasons for this can often be found in infrastructural, macro-economic and political risks. The criticality may even be higher if certain circumstances exist, like single-source situations, extremely long storage periods or patent dependencies.

Read also: Ingredient 2: Definition of Risk Inventory

Heiko Schwarz is the Founder and Managing Director of riskmethods, responsible for Sales, Marketing and Business Development. Heiko has been working in the software business for 16 years, with 13 years in different areas of the strategic purchasing market. He has excellent knowledge in procurement, supply management and risk management and has been successfully helping supply chain and procurement organizations implement solutions to increase performance, reduce costs and minimize risks.

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