Introduction to Global Supply Chain Risk Analysis
Risk assessment and analysis in the supply chain is a necessary evil today. Organizations have to ensure that they have all corners covered and are ready for the complications involving these processes. This introduction will take you through all that you should know to learn more about risk in the global supply chain, and the issues it can lead to.
Risks in the supply chain have evolved to become even more prevalent and common with time. The risk management strategies that businesses implemented and followed in yesteryears have failed to stack up in this day and age. The policies of days gone by have failed to maintain their efficacy during these modern times, and businesses now have to improvise and adapt to the changing environment.
No type of provider can avoid the risks of a global supply chain today. Even with the growing addition of security across the supply chain, risks exist across ocean, land and air freight. These risks are often unavoidable and inevitable for global supply chain businesses, since there is no way around them.
Definition of Risk
Traditionally, risk has been defined as an amalgam of two factors – a particular hazard and the chances or likelihood that the hazard will occur. To simplify this definition, risk is the probability or likelihood that a hazard such as financial fraud will occur inside a business.
As per environmental and human rights terms, this definition of risk translates into identifying all environmental and human rights violations that can result through a supply chain including pollution incidents, forced labor, and coming up with a probability for their likelihood.
Going by these terms, risk can be considered theoretical, and something that has a negative impact, which can potentially damage a business and hasn’t yet happened.
The aim behind risk assessment processes in the supply chain is to identify all potential sources of risk in the supply chain and to grade or prioritize them on the basis of their importance. As studied in previous sections, the importance of risk is evaluated and determined on the basis of the impact that the risk carries. The aim of risk management, on the contrary, is to reduce the likelihood or probability of these hypothetical problems and ensure there aren’t any roadblocks along the way. It is necessary for all supply chain stakeholders to have a clear understanding of the risk assessment and management processes. Where risk assessment deals with prioritizing, assessing and grading risk, risk management deals with managing and mitigating their impact. Risk assessment puts down the foundation for what’s to follow during a typical risk management process.
Who Is at Risk?
There are many areas of risk inside an organization. These areas can have different impacts, often leading to complications in revenue generation and profitability. There are many areas of risk, with the greater ones leading to a loss of business, financial failure and major interruptions to operations in a number of different ways.
When it comes to human rights and sustainability risks, the discussion hovers around the impact the risk will have on the outside environment and the reputation of the supply chain and parent organization. While organizations often look through the lens of profitability, they have now realized the importance of providing friendly working conditions to workers and practicing sustainable measures for protecting the environment from the perils of industrial smoke and transportation inefficiencies.
Risk Assessment and Compliance
A publication released back in 2011 by UNGP provided businesses with a framework they should follow for not only understanding their own responsibilities, but to also come up with a plan to mitigate and minimize the likelihood of risk. Human rights risk assessment is of great concern to the United Nations and was highly emphasized in the document.
When it comes to human rights risks, organizations should run consultations with all business stakeholders and determine strategies to combat risk. Stakeholders such as business partners, communities, employees, NGOs and even trade unions can share valuable insights into the process of policy making and setting the right course for risk management.
The UNGP made it clear within this document that the primary responsibility of ensuring human rights lies with the State. The private sector should uphold and comply with the laws mentioned by the State and should also be responsible toward respecting and promoting human rights. Private sector entities should realize the negative attributes that come with their management styles and what can be done to limit them.
Compliance with the laws and regulative measures is necessary, but it isn’t the only thing organizations are required to do today. Organizations in the business world today are required to also maintain a strict code of conduct, based on which they perform in a particular manner toward employees and the environment.
Most developing countries have concrete laws in place for risk management but lack the steps that should be taken here. The lack of proper steps and decision making can lead to companies exploiting labor and not giving human rights the importance they should be given. Companies have a responsibility of their own as well and should go beyond simple legal compliance to remain on the right side of ethics and the law.
Common Worker Rights and Environmental Risks Ignored by Supply Chains
There are a number of sustainability and human rights issues that businesses today can focus more on. The UNGP has termed the risks below to be the most salient ones and has crafted a policy to ensure businesses comply with risk management in this regard.
Fundamental Labor Rights
Workers suffer during the non-implementation of fundamental labor rights. The inability to provide these risks can land supply chains in hot waters.
Rights violations made here include:
• Forced labor
• Child labor
• Discrimination in employment toward people of a particular religion or caste
• Lack of respect for worker freedom and unions
Working Conditions and Remuneration Risks
Obviously, employees need to be given feasible working conditions to work in and should also be given the wages and remuneration they require. Risky violations that shouldn’t be made here include:
• Wages below the minimum wage level decided by the governing organizations
• Excessive hours of work
• Abusive treatment leveled toward employees for no violations as such
• Health and safety breaches
• Lack of access to the grievance mechanism
• Abuse of contracts
Social and Economic Rights Violations
These risky violations are mostly leveled on communities near the supply chain and manufacturing unit. The inability to address these violations can leave organizations with lasting repercussions, along with a supply chain that may never recover.
The risk factors involved in these violations include:
• Noise and air pollution affecting the local population in a specific area
• Emissions impacting the local water supplies or an improper drainage system
• Road transportation methods that create traffic constraints and lead to challenges
• Land grabbing activities without proper legal compliance
Civil and Political Rights Violations
Violations of civil and political rights are conducted by global supply chains and operators on communities and their own employees. These risk factors are a show of power and limit the voices against regressive policies.
Violations that can lead to this risk include:
• Preventing workers from forming unions and being part of unions together
• Collaboration within companies and security forces to repress community complaints against regressive measures
• Bribery and land grabbing policies
Sources of Risk
Risk can come at you from multiple sources or dimensions. Obviously, it is very hard to manage or determine where risk is coming from, but a simple grouping can help you determine the course of action.
For supply chain managers, the sources of risks are of key importance. These sources are a major part of the risk and need to be fully minimized or mitigated if a strategy is to be prepared. Sourcing your risks and being prepared for them can also lead to the aversion of possible dangers that result because of the risk.
Also, risk categories and sources aren’t meant to be exclusive. This means that the category basically operates as a tag or a label and that the risk in question can have more than one tag. In short, most risks are generated through inefficiencies in multiple sources and not just one.
Typical risk categories include:
• Organization etc.
An example of an external risk for a global supply chain operator would be a supplier missing their deadline and delaying the shipment that they have to provide. These delays cannot only lead to customer retention issues, but also signal problems in revenue generation. However, since supplier delivery timelines are often out of the organization’s control, there isn’t much that can be done about them.
This is something that we discuss in greater detail within the rest of this chapter as well. Supplier relationships are a key part of averting supply chain risk, and with good relationships, organizations can mitigate and minimize the chances of risks.
Internal risk factors come to the surface during change management. Change is a major part of supply chain progress, but can be really complicated for global operators to manage. Signaling a change in global sourcing and procurement patterns can lead to implications.
To take an example of internal risks, a management that isn’t involved in the organization’s transformation process will see a number of risks during the implementation of an Agile framework. These risks are however linked with internal management and external forces cannot be blamed for them.
Projects can often act as sources of risk as well. Projects are a major part of every supply chain today and need to be managed carefully for the right results. Project managers should be involved in the process, so that the backlog items are ready for the next iteration. Failure to keep a check and balance on the project can lead to delays and backlog creation for the next iteration.
Risk can also come through the final product being offered to customers at the end of a supply chain. All marketing attributes related to the product should be finalized and managed in a decent manner to manage the risks involved with them. If the product owner isn’t involved and sets either price, product, promotion or location wrong, the product is bound to suffer.
With the higher dependency on tech solutions in the supply chain, there are a growing number of technical risks involved as well. Technical risks make management difficult and can lead to massive downtimes if your management team and the tech team aren’t well equipped in the processes that they should follow for risk mitigation.
In short, the greater an organization’s reliability on tech solutions, the higher will be their chances of falling for technical risks. Automated solutions do make global supply chain processes easier, but they also come with their own perils in the way.
The people employed in a global supply chain also carry their risk. Global supply chains are stringent in their hiring procedures and hire the crème de la crème to represent their business. This is because people play an important role in not only mitigating but managing risk as well.
Training is an important part of the process here, where employees are trained to follow best practices in the industry and to ensure that they are up and available whenever the need be. If recruitment fails to rope in the best candidates and does not improve the pipeline, performance is bound to suffer.
The management and organization of processes is also a key factor in determining and dictating risk. The organization of key resources can either increase or decrease risk, based on the reaction to it.
We will look at the sources of risk and the common risks found in supply chains in greater detail in the coming chapters.
Time-Based and Situational Characteristics
Changes in situations and time periods can often result in a number of new risks. If we look at situations, it is a key characteristic for risks to pop up during change. The changing of team members, the undergoing of a major reorganization process, the changing scope of a project and the enhanced use of technology are all factors that can contribute and lead to risk. Change management is hence extremely important and helps steady the ship during times of turbulence.
Time-based risks can also pop up in a global supply chain. Time-based risks are certain risks that repeat themselves at particular times. For instance, the time during the start of a project or a new chain is often considered the riskiest. This time period comes with certain risks of its own and can be difficult to manage for managers or professionals involved in the process. The risk then diminishes along as the project moves forward and the impact reduces.
A core characteristic of risk is to have a domino-like impact on organizational processes. Many tasks and deliverables within a global supply chain are dependent on each other. A certain risk endangering the delivery of one shipment or one batch can accumulate and have a cascading impact on all other tasks as well. The result could be similar to a domino effect with lasting repercussions.
Risks are also known to be magnitude dependent. As we studied earlier, a higher impact can increase the magnitude of a risk as well. To explain this through a simple example, take up the choice of investing $1 for a 50/50 reward of $5 versus the risk of investing $1000 for a 50/50 chance of winning $5000. Obviously, the latter is a lot more complicated and riskier because the opportunity cost is higher.
History of Supply Chain and Risk Resilience
The roots of both operations research and industrial engineering can be found in logistics and supply chain-oriented research patterns. Frederick Taylor, who is accredited with writing The Principles of Scientific Management, back in 1911, is considered to be the father of both operations research and industrial engineering. The research conducted by Fredrick Taylor was inspired by logistics, after his early life experiences as a manual loader.
Operations Research gained precedence when scientists and innovators demonstrated just how useful analytics could be in studying and solving key military logistics problems. The complex requirements of the World War II required new innovations and strategies in military tactics, which is where these advancements came in particularly handy.
While both Industrial Research and Operations Engineering have been maintained separately, both these factors have found their best success when used together in the supply chain. The integrated framework used in global supply chains of today is the amalgam of both operations engineering and industrial research. This integrated framework helps address logistics and supply chain issues, while providing feasible conclusions and solutions for everyone involved.
This amalgam of engineering with operations planning is known as the supply chain engineering approach and is a major part of the supply chain today.
Supply Chain Management in the Early Years
Back in the early 1940s and 1950s the focus of most research conducted in logistics was on th