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Your Guide to Logistics / Supply Chain.
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4 Steps to Creating an Effective Risk Management Strategy

Does your company have a risk management strategy? What will happen if one of your key suppliers has a service disruption due to a labor issue such as a strike? How will it affect your operations? More importantly, how will it affect service to your customers?

Progressive organizations are implementing a risk management strategy to enable them to react to potential issues in a streamlined fashion. By having a plan, organizations are able to minimize a large ripple effect other operations within their organization.

1. Identify SCM Risks
   • Supplier capacity
     If you have a sole supplier for a major product line, your operation may be at risk if there is a supply issue. Determine what percentages of your products (dollar or unit volume) are sourced from your top suppliers.
   • Internal processes (i.e. Manufacturing, Assembly)
     Review everything from equipment maintenance to quality control procedures. Ensure there are back-up plans in the event of equipment failure. Identify a back-up supplier if you source a specialty item from a supplier that may have a quality issue in the future (i.e. company sold, new management, etc.).
   • Warehouse capacity
     Monitor seasonal trends to identify the peak volumes in your operation. Forecast volumes at least 1-2 months in advance to determine if your operations will be able to meet demand. Have a plan to use a preferred supplier for outside storage space if required – don’t wait until it’s needed.
   • Transportation availability & rates
     Ensure that your organization has relationships with other carriers in the event of a disruption with your current one. Review other modes of transportation (i.e. Air) if the primary mode fails to meet your customer’s needs.
   
   
2. Assign Risk Owners
   • Ensure accountability
     Once each potential risk are has been identified, a risk owner should be assigned to each area. It will be their responsibility to report on the risk strategy on a periodic basis. If no-one owns it, it will not get done.
   • Keep plan current
     As the supply chain is a dynamic environment, ensure that the risk owner keeps tabs of the risks in their area. Events such as a new supplier, new products and new customer requirements should be updated in the plan.
   
   
3. Evaluate Risk Impact
   • Assess financial impact
     For each risk, assess what the financial impact will be to the organization in the event of a disruption.
   • Assign probability
     Assign a probability to each risk area. For example, a new supplier may have a higher risk of service failure because of the short history of the relationship.
   • Prioritize
     Multiply the financial impact by the risk probability. Order the results by descending dollars. Prioritize the top risks for more management attention.
   
   
4. Develop Action Plan
   • Monitor on a Quarterly basis
     Find alternative solutions to deal with each area of risk. Monitor the top risk areas on a minimum Quarterly basis. The medium risk areas may be monitored every 6 months and the low priority risks once per year.

By following these 4 steps your organization is well on its way to identifying the top risks that it may face as well as having an action plan in the event that they do.