6 top supply chain risks for companies to mitigate
As supplier relationships become increasingly complex and major disruptions continue, it pays to understand the top supply chain risks. Here are six and how to manage them.
Global supply chains are vast, interconnected networks that are vulnerable to innumerable risks -- but some stand out as the most important.
Problems like increasing tariffs and geopolitical conflicts can affect a company's profit margins, while the cascading natural disasters caused by climate change can disrupt trade routes and destroy goods. Cyberattacks and a lack of communication with supply chain partners can result in order delays, negatively affecting customer service, and poor supply chain planning can lead to a lack of available products during peak seasons, which also disappoints customers. However, mitigation strategies do exist, including using supply chain platforms and creating service-level agreements (SLA) to clarify a company's expectations for supply chain partners.
Here are some of the top risks to supply chains and how to mitigate them.
1. Rising tariffs and duties
Rising tariffs on products and materials that are manufactured overseas can result in reduced profits for companies. If a company sells products in a foreign country, the country's leaders might decide to give the company's local competitors an advantage by increasing tariffs on imported items, which can reduce the company's revenue in that country.
Supply chain leaders can help minimize the impact of tariffs by working with customs brokers and foreign trade experts. Brokers can carry out the following duties for companies:
- Keep companies informed about likely upcoming tariff changes so they can plan accordingly before losses occur. For example, company leaders might decide to stop selling products in a certain country altogether because the tariffs costs will negate any profits.
- Suggest ways to route goods that will minimize tariff payments.
- Suggest ways to reclassify goods into lower tariff bands.
- Suggest techniques such as temporary imports, duty drawback or foreign-trade zones to defer and reduce duties and fees.
2. Geopolitical conflicts
War and general regional instability can cause significant supply chain disruptions.
Conflicts often lead to shortages and increased overall prices for certain commodities because resources from the countries at war are no longer available. In addition, companies might need to reroute their transport to avoid conflicts, which increases journey times and ocean shipping costs.
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Guide to supply chain management
Customers might decide to boycott products that are produced in certain countries, leading to reduced profits for companies if they own factories or warehouses in those areas.
Supply chain leaders can help mitigate these risks by identifying alternative suppliers that are outside of conflict zones, helping avoid delivery delays. Freight forwarders can also assist in finding carriers that provide alternative routing at lower rates.
3. Natural disasters
Both natural and man-made disasters can majorly disrupt supply chains, with these problems affecting manufacturers and supply chain partners that are located in the affected areas as well as product transportation. For example, roads to and from a factory might be shut down in the aftermath of flooding, resulting in product delivery delays, or a tornado might destroy a company's warehouse. Climate change will only make natural disasters more common in the coming years.
Supply chain leaders must build more resilience and business continuity into their supply chain and work with logistics providers that offer global supply chain optimization. If one part of the supply chain hits delays and bottlenecks, new suppliers and alternate routes can preserve the flow of products. For example, a logistics provider might suggest that a company permanently alter one of its delivery routes so delivery trucks don't travel through a coastal area that is increasingly experiencing hurricanes.
Real-time tracking helps here as well. A combination of IoT devices and supply chain software can help businesses identify delays and disruptions before they become major issues. Supply chain software could flag persistent flooding near a company's warehouse over the past few years and suggest that the company move the warehouse.
4. Lack of integration with supply chain partners
Communication and integration are critical for maintaining complex, international supply chains. Unfortunately, factors such as different time zones and work styles as well as technological disparities can lead to issues with supply chain partners.
For example, a company and one of its supply chain partners might follow different disaster recovery standards. If the supply chain partner's area experiences a hurricane and the partner loses various records to water damage because the partner was not backing up files, the company's operations will be negatively affected by that loss of data.
An SLA can help with these issues, as they lay out specific standards that each partner must meet and can help reduce confusion about expectations.
Supply chain partners can also resolve communication issues by integrating across a common supply chain platform. The software gathers data and updates from all supply chain partners, providing a common frame of reference. For example, supply chain software's invoicing capabilities can enable faster payment processing, which will likely improve the relationship between a company and its supply chain partners. In addition, the software's supplier data management tools enable supply chain leaders to answer suppliers' questions through the platform, which avoids delays in communication because supplier emails got lost in busy leaders' inboxes.
5. Cyberattacks
Supply chain partners might use different technologies and follow different information security practices. These disparities can increase data vulnerability and the likelihood of cyberattacks. An attacker who gains access to supply chain systems can steal data and disrupt the flow of orders and products. For example, cyberattackers might hack into a company's systems and steal a company's customer contact information, then sell it to competitors, which will reduce the company's profits.
One way to deal with supplier-related security threats is to make robust data security part of any agreement with a third party. Supply chain leaders should require that any suppliers, carriers or other partners meet certain standards for data protection so a partner's cybersecurity issues don't negatively impact the company's operations. For example, cyberattackers may hack into a company's supply chain partner's systems and send phishing emails to the company's employees, which will harm the company's operations if any employees click on the links inside.
6. Lack of product availability
A company's success relies on optimum inventory management practices. Product availability is dependent on balancing the following elements:
- Supply is the number of products that are available from manufacturers.
- Demand is the amount of products that consumers want.
- Capacity is the resources required to manage and transport products through the supply chain.
If a misalignment exists between supply, demand and capacity, stock levels won't meet brand or customer needs, which negatively affects company profits. For example, a company that often experiences its highest sales in December must make sure it has manufactured enough products to meet this demand, or the company's profits and customer service will suffer.
One way to avoid an imbalance is to forecast and model future supply chain needs, enabling better supply chain planning. Supply chain software often includes advanced forecasting features that can carry this out. For example, at the beginning of the pandemic, an office furniture company might have experienced increased sales from consumers because of customers buying new items for their home offices. Supply chain software will flag these higher sales and notify the company's supply chain leaders that they must manufacture more products to meet this increased demand.
Paul Maplesden creates comprehensive guides on business, finance and technology topics, with expertise in supply chain and SaaS platforms.
