As a business attempts to become more efficient, it may make its supply chain increasingly vulnerable to risk. Businesses use strategies such as outsourcing, supplier consolidation and low cost sourcing to improve efficiency, but these practices can add risk and a supply chain is only as strong as its weakest link, Supply Management stated. Risk analysis in strategic sourcing is crucial, and failure to identify and minimize risks can lead to profit loss.
Ninety percent of firms fail to perform a risk assessment before outsourcing, Supply Management found. Some organizations fail to do anything more than create an annual risk register, which is usually for their insurance companies. Annual risk registers are a static assessment of risk when there are many dynamic factors at work in a global operation. The longer a supply chain is, the more vulnerable it can be to risk. Businesses often seek risk mitigation as impeding their profit strategies.
The best way to be adequately prepared for risk is to develop a proactive strategy. Dr. David Simchi-Levi of Massachusetts Institute of Technology created a new tool for supply chain management called the Risk Exposure Index. It allows managers to quantify risks in a way traditional methods did not allow, according to Supply Chain Digest. An important part of the approach involves time to recovery, a measurement of how long it would take a particular node of the supply chain to fully recover after a large disruption. Older approaches to risk mitigation did not account for completely unexpected events, like natural disasters. Understanding the impact of a major disruption to a link in a supply chain can allow businesses to be better prepared.
Procurement teams are often focused on waste reduction, supply chain performance and cost reduction, but risk preparedness can reduce total costs and protect an organization from the huge profit loss that can occur from a supply chain disruption.