Supply Chain – An External Risk
Business risks can be classified as internal and external. An internal risk is one you have control over but unfortunately your supply chain is an external risk you can’t control. Supply chain risks can be caused by a disruption to the availability of raw materials, parts or the finished product.
The coronavirus has made many business owners realise they need to have a plan for worst case scenarios and to be ready for anything.
Identify the Risks
To ensure the survival of a business, owners/managers must identify all relevant risks. It’s a case of thinking about every scenario that may occur and consider if it could happen in your organisation. Ask yourself a series of questions including:
What, when, where, how are risks likely to occur in the business?
Are the risks internal or external?
Who may be affected by the worst case scenario?
Consider the consequences of events like:
Natural disasters, Act of God
Loss of electricity supply
No internet access
Suppliers going out of business
Loss of key personnel
Important documents lost or stolen
Customer data lost or stolen
Managing the Risk of Supply Chain Disruptions
If you’ve identified the loss or disruption to your supply chain as a possible risk, it may be due to your:
Supplier closes business
Supplier’s factory is damaged or destroyed
Supplier’s staff are unavailable due to illness, injury or industrial action
Raw materials or parts are unavailable
Products are lost or stolen
Transportation is unavailable
Overseas government interference
Keeping Stock on Hand
Some businesses are luckier than others in terms of access to stock. A building company for example can be confident that they can buy enough cement they need from multiple sources so there’s no need to keep it in stock. They place the order and it’s delivered on site the day they use it. There’s no double handling, storing and stock on hand costs.
But when a business relies on a product to come from overseas, the delivery time is much longer and the risks greater. Keeping plenty of stock on hand is one way to reduce supply chain risks, but it costs money that can place a strain on cash flow. Cheaper alternatives are needed.
Speak to Your Supplier
Let your supplier know you’re doing a review of the risks to your business. Ask how they would cope if they were faced with adversities like a fire in the factory or loss of electricity supply. Do they own multiple factories that could take over production quickly? Are they confident that they can always access the raw materials they need and trained staff? If it becomes clear that the factory has no back-up plans, you may want to consider using another supplier.
Do your research and source a back-up supplier. If your current supplier closed their factory tomorrow you may need to be able to make contact with an alternative supplier and ask them to start producing immediately. You may want to ensure the back-up factory isn’t in the same location in case of a natural disaster or government interference. Different geographic locations of suppliers further spreads your risk. Speak to an import agent who has a good relationship with reputable factories that can supply your goods at short notice.
Discuss the factory’s ability to fulfill the size of your orders. Perhaps check with all your suppliers how they access raw materials needed to manufacture if there was a shortage. If possible, place a test order or go through the sampling process to ensure you’re happy with the quality.
Even when you get the goods out of the factory on time, they may be late or never arrive due to transport problems. Your goods may be bumped from the ship at the last minute by a more profitable container. It’s important to have a good relationship with the shipping line to reduce your risk of being bumped. An agent that ships for multiple clients is considered more valuable than a single business importing goods.
Think about what you would do if your goods were lost at sea in wild weather and ensure you have enough stock to cover you while replacement goods are manufactured. Shipped goods are lost and stolen more often than you might think so it’s important to have a plan for that event.
If 2020 has taught all of us a lesson, it’s that anything can happen.
If you need to safeguard your business against potential supply chain problems, please contact Vara Allied online.