Modern supply chains are spanning the globe — and in turn, they’re exposed to more business risks than ever before. That’s why organizations are taking a significant interest in supply chain risk management (SCRM).
But what is SCRM? Why does it matter? And, most importantly, how can your business take steps to reduce risks?
Read on to learn more about supply chain risk management, how it works, and the strategies you need to protect your organization.
What Is Supply Chain Risk Management?
The National Institute of Standards and Technology (NIST) defines supply chain risk management as the process of identifying, assessing, and mitigating the risks associated with supply chain operations. SCRM includes proactive measures to protect supply chains from disruptions due to both predictable and unforeseen events. The goal is to minimize vulnerabilities and manage threats to maintain a smooth flow of goods and services.
SCRM is closely related to supply chain resilience — the capacity to handle disruptions and maintain operational continuity. Risk management provides the foundation for a resilient supply chain, ensuring it remains adaptive in response to anticipated and unexpected changes. Thus, it’s also a key aspect of supply chain optimization, which focuses on maximizing efficiency.
Why Is Supply Chain Risk Management Important?
Risk management is crucial because it protects a company’s operations from potential disruptions that could lead to financial losses, decreased customer satisfaction, and reputational damage. A resilient supply chain can adapt to or quickly recover from unexpected challenges, such as supplier failures, natural disasters, or geopolitical events, which can jeopardize the company’s ability to deliver products on time and meet demand.
Critically, reports suggest that the rate of supply chain disruption is increasing. According to an Economist survey, the COVID-19 pandemic caught most businesses by surprise in 2020, but the years since have brought a concurrence of disruptive forces. Per the report, such events have incurred substantial financial costs — averaging 6-10% of annual revenues. Worse yet, most executives anticipate more disruption in the coming years, underscoring the value of a solid risk management strategy.
Although many organizations have made progress, McKinsey’s research identifies considerable gaps that could leave companies vulnerable. In 2024, 90% of executives report having experienced supply chain challenges, yet few believe their leadership teams have an in-depth understanding of supply chain risk.
Types of Supply Chain Risks
Modern supply chains are often complex global networks with parts being sourced across multiple countries with different rules, regulations, and risk factors. As such, they may encounter a wide range of disruptive forces, both externally and internally.
External Supply Chain Risk Factors
These risks originate outside the organization, which means they’re typically harder to predict or control. Some of the most common external supply chain risks include:
- Natural disasters: Extreme weather events like hurricanes, earthquakes, or floods can interrupt production and transportation, causing major delays. For example, in 2023 heavy rains and flooding in California, Nevada, and Utah caused a 20% to 30% decrease in shipments in areas where transportation systems were disrupted.
- Geopolitical risks: Trade wars, tariffs, and political instability in sourcing countries can drive up costs or limit supply availability. Military conflicts, such as the Russia-Ukraine war, can also impact prices, disrupt trade routes, and more.
- Market risks: Fluctuations in demand or raw material prices can lead to excess inventory or shortages. A sudden spike in demand can lead to shortages if suppliers can’t keep pace, resulting in delayed production and lost sales. Conversely, a drop in demand or an increase in raw material costs can leave companies with excess inventory, tying up capital and increasing storage costs.
- Cybersecurity risks: Attacks on supply chain systems can disrupt operations and lead to data breaches. If hackers steal customers’ personal information, it can damage their trust in the business. Therefore, cyber risk often coincides with reputational risk.
Internal Supply Chain Risk Factors
This refers to risks that originate within the organization. They can include:
- Operational risks: Inadequate planning, inefficient processes, or equipment failures can reduce output quality and delay delivery. For instance, if critical machinery goes down for maintenance, the downtime can halt production until repairs are complete.
- Supply chain complexity: Companies may rely heavily on specific suppliers or source materials from distant locations, increasing their exposure to potential disruptions. For instance, if a key supplier in a far-off region experiences delays due to natural disasters, political instability, or logistical challenges, it can halt production across the entire supply chain. Over-reliance on a single supplier or country also limits flexibility, making it harder to pivot when issues arise.
- Organizational risks: Business risks related to labor, such as shortages, untrained staff, or poor working conditions, can significantly affect productivity and quality. Workforce challenges can lead to delays in production or difficulty meeting demand, while untrained workers may lack the skills needed to maintain high standards or handle complex tasks efficiently. Poor working conditions can result in higher turnover, absenteeism, or even strikes, disrupting operations.
Benefits and Challenges of Supply Chain Risk Management
SCRM has its advantages, but it also comes with notable obstacles along the way.
Benefits
Why focus on managing supply chain risk? Simply put, it can unlock the following:
- Improved resilience: As IBM explains, supply chain resilience is one of SCRM’s most important benefits. By identifying vulnerabilities, companies can prepare for potential disruptions and recover more quickly. This not only helps maintain business continuity but also ensures operators can meet customer demands.
- Enhanced customer satisfaction: A resilient supply chain ensures timely delivery, which boosts customer trust and loyalty. Mitigating a potential risk before it impacts the supply chain can help organizations avoid negative publicity — not to mention compliance violations.
- Cost savings: Proactively managing supply chain risk can prevent costly disruptions, helping companies avoid penalties, expedited shipping fees, customer reimbursements, and other financial losses.
- Competitive advantage: Companies with strong SCRM can adapt more easily to changes, positioning them as reliable partners in the marketplace. Moreover, a strong reputation can help win customers and clients, who will feel more comfortable doing business with safe and reputable organizations.
Challenges
The above benefits aren’t guaranteed. Several factors complicate risk management, such as:
- Supply chain complexity: Global supply chains have multiple layers, making it challenging to monitor every link. Logistically, it’s often difficult to keep tabs on the entire supply chain network from beginning to end, especially without the right technology.
- Data and visibility: Limited access to real-time data from suppliers can hinder proactive risk identification and response. Likewise, in offshore or overseas manufacturing, original equipment manufacturers (OEMs) may lack visibility into daily operations. Without on-the-ground support, production will run inefficiently, product quality will suffer, and intellectual property may be lost.
- Cost of implementation: Implementing SCRM requires investment in technology, training, and personnel, which can be costly for some companies. It also requires time that OEMs may not have, especially with pressure to compete on the global stage.
- Resource constraints: Smaller companies may lack the resources to build a comprehensive SCRM program. They might not have the requisite infrastructure or expertise to understand and prepare for their potential threat landscape.
Building a Risk Management Strategy
The good news is that there are tangible actions businesses can take to enhance their SCRM posture for short- and long-term success. According to IBM, these include the following steps:
1. Identify
The first step in building a resilient supply chain is to map out every component, from raw materials and suppliers to transportation and logistics partners. By identifying each link in the supply chain, companies can pinpoint potential risk points and understand how disruptions at any stage could impact the entire process.
This includes examining not only direct suppliers but also secondary ones, as well as logistics providers, warehousing facilities, and distribution networks. A comprehensive map allows organizations to anticipate vulnerabilities and prepares them to address issues proactively.
2. Assess
Once potential risks are identified, the next step is to assess each risk by evaluating its likelihood and potential impact. This risk assessment phase involves analyzing historical data, market trends, and current conditions to rank risks from high to low priority (e.g., assigning risk scores). By quantifying both probability and severity, companies can focus their resources on the most critical areas, addressing high-impact events that could drastically disrupt operations.
3. Mitigate
After identifying and assessing risks, companies develop and implement strategies to mitigate them. This phase involves creating contingency plans for high-priority risks. For instance, companies can establish relationships with multiple suppliers to reduce dependency on any one source, or they can store extra inventory to buffer against sudden demand spikes or supply disruptions.
4. Monitor
Resilient supply chains must continuously monitor risks through data and technology. By integrating tools such as predictive analytics and artificial intelligence (AI), companies can track key indicators, such as supplier performance, demand fluctuations, or transportation delays.
This real-time monitoring enables organizations to detect potential disruptions early, allowing them to respond swiftly and effectively. Continuous monitoring also provides visibility across the entire supply chain, ensuring that decision-makers are informed and can take preventive action before minor issues escalate.
5. Review and Improve
SCRM is ongoing. Regular reviews help ensure that strategies stay effective as risks evolve. After any disruption, a post-event analysis helps organizations learn from the experience, refining their plans and making necessary adjustments to strengthen resilience. Additionally, routine reviews allow companies to update their strategies as risks evolve, whether due to new suppliers, market conditions, or emerging technologies.
Supply Chain Risk Management Best Practices
There are countless ways to improve supply chain risk mitigation. Here are a few best practices to get you started:
- Diversify suppliers: Reducing reliance on a single supplier minimizes the impact of disruptions from any one source. By establishing relationships with multiple suppliers, particularly in different regions, companies can pivot quickly if they encounter a problem. Diversification not only enhances supply chain resilience but also encourages competition among suppliers, which can lead to better pricing and service quality over time.
- Reshoring: Having realized their risk exposure is too high, many organizations have begun reshoring their manufacturing operations. Bringing production closer to home can reduce reliance on global logistics and improve control over supply chains.
- Invest in technology: Tools like predictive analytics, the Internet of Things, and AI enhance visibility and enable faster responses to issues. These tools provide real-time data, allowing companies to track inventory, monitor supplier performance, and forecast demand accurately.
- Maintain safety stock: Maintaining a safety stock of critical materials acts as a buffer during times of disruption, allowing production to continue smoothly even if regular supply chains are temporarily interrupted. While this inventory management strategy does require additional storage and costs, it can prevent costly downtime and lost sales during demand surges or supply delays.
- Conduct regular audits: Conducting regular audits of supply chain processes and protocols helps ensure that risk management measures remain effective and up-to-date. Audits identify potential gaps in supplier performance, compliance, and operational standards, enabling companies to address issues proactively before they lead to larger disruptions.
Reduce Risk With Strategic Workforce Solutions
At Supply Chain Resources Group (SCRG), we know the importance of keeping your supply chains running smoothly. Whether your manufacturing operations are overseas, close to home, or somewhere in between, our strategic workforce solutions can help optimize processes and mitigate potential risk.
For example, our Talent on Demand services can provide temporary or specialized talent to fill critical roles, ensuring continuity in times of high demand or crisis. SCRG supports companies in rapidly onboarding and integrating new hires, allowing for seamless transitions when adapting to supply chain changes. This minimizes disruption, especially when shifts in the workforce are required due to new regulations, technological upgrades, or process changes.
We can also support reshoring initiatives with our recruitment services. Our search teams locate and recruit the local experts you need to succeed, helping your operations get up to speed in a hurry. From engineering to program management, you can leverage our network of world-class talent to fill your most important workforce gaps.
Also, to ensure your partners are as reliable as possible, you can harness our supplier selection process. We evaluate potential suppliers on your behalf, examining factors such as quality control processes, financial stability, capacity, and compliance with industry standards. This in-depth assessment ensures you partner with suppliers who can consistently meet requirements and adapt to changes in demand.
Ready to protect your business from supply chain risk? Contact us today to learn more.