The COVID-19 pandemic has impacted businesses around the world and forced them to reevaluate the ways they identify and manage risks. It has also revealed the vulnerability of global supply chains that have developed over the last several decades. Managing supply chain risk will very likely become a key focus for many industries in the future.
What is Supply Chain Risk?
A supply chain risk is any situation that can potentially disrupt or delay the flow of raw materials and products through a supply chain. Organizations use a variety of supply chain risk management strategies to ensure that these networks keep operating efficiently. While supply chain risks can take several forms, the COVID-19 pandemic has revealed a number of specific challenges that can have serious consequences for business operations. It’s important to remember that a pandemic isn’t the only event that could increase the severity of these risks.
5 Common Supply Chain Risks
1. Logistics Disruption
For all the sophistication of the global economy, many sectors are still reliant on the seemingly simple ability to transport physical materials from one location to another. Modern supply chains form a complex web of logistics, connecting different forms of transportation and shipping processes. Any disruption to this ecosystem can result in costly delays. For instance, a country that manages to avoid the direct effects of a pandemic might be able to manufacture and ship products to less fortunate countries, but those goods may end up stuck in a warehouse if there aren’t enough healthy truck drivers to transport them to retailers and customers.
2. Inadequate Infrastructure
Managing the tangled web of global supply chains requires a powerful IT infrastructure that allows a wide array of stakeholders to communicate and facilitate transactions. If those IT systems go down, the physical process behind them can be left in the lurch, resulting in costly delays and greatly increasing the likelihood of mistakes. The ability to manufacture and deliver products to a warehouse doesn’t do a business much good if an unreliable inventory management system prevents it from connecting those products to vendors and other consumers. Whatever role an individual company plays in the supply chain, it’s imperative that it has an IT solution in place that delivers high levels of uptime and keeps essential data and applications backed up to ensure business continuity.
3. Supplier Shutdowns
As the COVID-19 pandemic has demonstrated, the global supply chain can suffer extreme shocks when key suppliers are temporarily taken offline. Due to the interconnected nature of global supply chains, very few products are manufactured entirely in one place. Many components originate from different suppliers and are then shipped elsewhere to be assembled and distributed. Any disruption in this process creates a ripple effect that impacts productivity elsewhere. A factory that assembles mobile devices in one country may be able to operate at full capacity, but it won’t be able to produce anything if it hasn’t received key components from a factory that’s shut down in another country.
4. Data Exposure
Global supply chains involve a vast array of vendors from many different countries, all of which are governed by different regulatory standards when it comes to protecting essential data. Companies with relatively lax security requirements can introduce a substantial risk when they enter into data-sharing relationships with other firms. Whether due to inadequate cybersecurity or the careless handling of data, supply chain relationships are a potential weak link in global information security regimes. Each new vendor added to a company’s supply chain introduces new cybersecurity risks that need to be managed and mitigated. It comes as little surprise, then, that the AICPA introduced SOC for Supply Chain attestation reports in 2020 to help companies better manage their supply chain risk.
5. Cash Shortages
Organizations can survive periods of low or even negative revenue resulting from supply chain disruption. What they can’t survive, however, is a complete lack of cash. Without cash on hand to pay employees, suppliers, and leases, a company can quickly go into bankruptcy. While the coronavirus-induced recession has not disrupted credit markets in the same way as the 2008 financial crisis, it nevertheless underscores the value of cash flow and the danger of overleveraging assets to drive supply chain growth.
4 Ways to Mitigate Supply Chain Risks During a Pandemic
As many organizations are discovering, a pandemic does not have to bring all supply chain activity to a complete halt. There are a number of steps they can take to mitigate risk and keep their business operations moving even during periods of severe disruption.
1. Educate and Screen Employees
Limiting the spread of infection should be the primary goal of any company during a pandemic. A healthy workforce is better able to stay productive and innovative, making them more likely to develop workarounds and other solutions to overcome supply chain disruption. Companies need to implement strong health screening policies and make sure their employees have the most accurate and up-to-date information to help them better manage their own health.
2. Prepare for Absenteeism and Succession
Some level of disruption is inevitable during a pandemic, so it’s imperative that companies account for potential declines in productivity and efficiency. They must be prepared for employees to miss work for extended periods by putting clear policies in place to manage absenteeism and accommodate reduced capacity. It’s also important to remember that people at the management and executive leadership level are just as vulnerable as line workers. Succession plans should be developed to ensure that someone is always in place to assume key responsibilities should the need arise.
3. Facilitate Remote Work
The COVID-19 pandemic has prompted a massive transition to remote work. While this has been effective in limiting the virus’s spread, it has also introduced a number of problems from the standpoint of IT infrastructure capacity and cybersecurity risks. Organizations are already working to address these challenges, and strengthening the foundations of the remote workplace will be critically important to limiting supply chain disruption in the event of future pandemics.
4. Adopt Digital Supply Networks
Traditional supply chain structure has emphasized optimization to minimize costs and reduce inventories. This has led to the creation of a very linear map of supply chain relationships that has many potential points of failure. Today’s digital technologies have the ability to provide much greater visibility and control over supply chains, which in turn translates into increased agility and resilience. Digital supply networks leverage cloud computing, artificial intelligence, and Internet of Things (IoT) functionality to create a more dynamic network that is able to adapt to shocks and recover from disruptions more quickly by rapidly shifting resources and distribution channels.