Integrate and Survive the Supply Chain Disruption Effect

Since the 1970s, the just-in-time inventory ordering process has existed to reduce waste, improve cash flow, increase flexibility, optimize human resources, and encourage team empowerment. Disruptions to supply chains present one of the biggest risks to continuity of services due to critical dependencies on suppliers to provide goods and services. There are many factors that can cause a supply chain disruption — from global pandemic, war and acts of aggression, diplomatic tensions arising from espionage and terrorism, climate change, and, above all, oligopolistic control of certain supply chains. Building a resilient supply chain has become a primary prerogative for business continuity and security.

What is supply chain resilience? Simply stated, it refers to the ability of a given supply chain to prepare for and adapt to unexpected events. A resilient supply chain adapts quickly to any sudden disruption that could negatively affect the performance of the supply chain. It also allows an organization to quickly recover to its pre-disruption state or a more desirable state. In recent years, we have seen an unprecedented demand in the increased usage of e-commerce sales that are now being stretched to its upper limits with the effects of labor shortages and inventory depletion. The combination of manufacturing lockdowns in China, geopolitical distress in many parts of the world, and logistical and operational challenges have created serious bottlenecks and breakdowns in the global supply chain.

Given these interruptions that have led to the current fragile global supply chain, the question is how do both government and commercial organizations prepare to survive and thrive in this time of multiple supply chain disruptions? A key factor to supply chain resiliency is understanding the suppliers that are in an organization’s supply chain. Suppliers may provide key components or products to a suppliers’ supplier and, thereby, still be vitally important to the organization, because it depends on those goods to manufacture, build, develop, create, sell, or operate effectively. This is called “illuminating the supply chain,” and shines a light on who is an essential part of the supply chain that the organization depends on. Another important element is understanding the provenance of supplies — where they originate from and their “chain of custody” as they make their way to the organization. Next, it is crucial to identify which suppliers in an organization’s supply chain are critical suppliers to operations. Once those critical suppliers have been identified in an organization’s supply chain, the next steps include using Supply Chain and Enterprise Risk Management principles of risk identification, risk impact assessment, risk prioritization, and risk mitigation strategies to address where the vulnerabilities exist in the supply chain. This visibility into the supply chain will allow an organization to pivot and allocate the necessary resources and capabilities to better mitigate these supplier risks.

Creating a communication channel, or integrating to some extent, between the Supplier Risk Management program and the Enterprise Risk Management program is critical for sharing supplier risk information and determining vulnerabilities to an organization’s supply chain. Supplier risk information needs to be collected and monitored in an organization’s Supply Chain Risk Management program, and then shared with an organization’s Enterprise Risk Management program so that the senior leadership team can evaluate how a supply chain disruption can impact the enterprise risks tied to the organization’s strategic plans and business objectives. Potential supply chain disruption information needs to be clearly defined and monitored, using both key performance indicators and key risk indicators in a risk register or supplier risk dashboard. As illustrated in the following chart below, supply chain disruptions can impact the following eight enterprise risk categories:

Table 1: Impact of Supply Chain Disruptions

Achieving Resilience Through Supply Chain Risk Management (SCRM)

SCRM lies at the intersection of the organization’s supply chain and enterprise risk management (ERM) programs. For SCRM to be holistic, it should be completely integrated with ERM. While ERM looks at risk management strategically from the perspective of the entire firm or organization, the scope of SCRM stretches beyond organizational boundaries extending to risks that sometimes originate outside the organizational boundary but having significant impacts to the operations mission and operations. SCRM supports ERM by identifying, assessing, and managing against supply chain events that could lead to potential losses, dangers, hazards, and other harm.

Building a resilient supply chain requires careful strategic planning and execution of key activities within the end-to-end supply chain. This is usually accomplished through a formal SCRM program that enables organizations to identify, assess, manage, and monitor supply chain risks. Supply chain risks can manifest from both internal and external sources.

Taking an Enterprise Approach to SCRM

Supply chain resiliency is best achieved when supplier risk management aligns with an organization’s Enterprise Risk Management program. The supply chain is a critical lifeline to the organization’s performance and the accomplishment of its mission and objectives. Individual supply chains are not only interconnected to other supply chains but also impact multiple organizational activities and processes, and, therefore, cannot be viewed and managed in isolation.

This article originally appeared in The AGA Washington Connection Newsletter.