What Is Supply Chain Risk Management?

Alex Newth

Supply chain risk management (SCRM) is a business practice in which professionals look at the supply chain and assess it for risk. Risk in the supply chain can be broad and can deal with internal or external risks. Unlike other risk management activities, supply chain risk management must be coordinated between managers and all aspects of the supply chain. SCRM is used to assess problems that need to be fixed or, in the worst-case scenarios, assess when a product becomes too risky to produce.

An illustration of a supply chain.
An illustration of a supply chain.

Supply chain risk management starts before the product is manufactured. Risk managers must assess financial impacts that manifest from problems in the supply chain from the beginning. Managers must also come up with strategies to fix or alleviate these problems. This information is often looked over before a product is green-lighted for production.

Supply chain risk management assesses the problems that might arise within a supply chain.
Supply chain risk management assesses the problems that might arise within a supply chain.

On the external side, supply chain risk management looks at problems that occur outside the company. This includes demand for the product, disturbances in other companies producing the product, the financial stability of related businesses, and the condition of the supplier’s facility. To mitigate these problems, the risk managers will often speak with managers of the other facilities and companies and will create strategies such as using backup companies to produce a product.

Internal supply chain risk management deals with the main company’s risk. Some of the risk factors are similar to external supply chain risk management, such as the manufacturing of the product if done by an internal branch of the company. Other factors include change of management or key personnel within the company or problems with planning or lack of planning.

Supply chain risk management, for every potential problem, typically includes a list of possible vulnerabilities the company will suffer. This allows managers to plan for scenarios that could halt production. By knowing every risk and vulnerability, plans can be made in advance to alleviate otherwise devastating problems, allowing the company to continue making money.

Along with assessing for vulnerabilities and making strategies, supply chain management must also figure the cost for such strategies. For example, if one of the company’s producers cannot create the product, a potential strategy is to contact another producer to make the product. This alleviates the problem of supply, but the other producer may charge more for production. Supply chain management must figure in this additional cost and ensure that, even with the change, the company can still make a profit.

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