Supply Chain Risks: What Questions Should You Be Asking?

Tuesday, July 12th, 2016
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Most people are aware that in business, as in most things in life, there are risks. Whether we’re setting up a new team, buying a new product, or simply crossing the road, we need to think about what risks may be encountered and how we can manage those.

Your appetite for risk (or how much risk you are willing to expose yourself to, and manage) can vary from week to week, from work to personal issues, and from the role of newcomer to the position of seasoned expert. When we’re talking about supply chains and procurement, it is often said that there are five main areas of risk:

  1. Regulatory/compliance: different countries have different regulations around everything from health and safety to human resources, so if your supply chain touches multiple countries (as most do) then you need to ask if you’re across what those regulations might be and whether you’re up-to-date with regulations even within your own country. The harder you find those questions, the more likely it is that there are risks you can’t see coming along your supply chain.
  2. Environmental/natural: the more states and countries your supply chains pass through, the more potential for risk. These ‘natural’ risks may include climate extremes such as storms, earthquakes, bushfires, flooding and tsunamis, and it’s important to ask yourself how resilient your supply chains are. Should just one part of your supply chain be affected by extremes of weather, will projects simply stop or can your procurement processes be seen as truly resilient by having alternative pathways already in place? Can things truly ‘bounce back’?
  3. Economic/financial: once again, looking at the different territories, countries and economies through your supply chains can show you the risks that may exist. A currency collapse, market freeze, widening exchange rate or national credit default may be enough to temporarily or permanently affect one part of your procurement process. Do you have other options, or would your local project be massively impacted by an economic failure on the other side of the world? Economic risks can also be caused by demand risks – rising inflation and decreasing consumer confidence can lead to a lack of demand for products and projects.
  4. Governmental/political: with fast-changing political circles, both domestically and internationally, is your supply chain exposed to major risks as a result of political change? Whether this involves countries leaving the EU, an Arab Spring causing trading halts, or a long drawn-out election and subsequent hung parliament causing investment panic, political change can have a major impact on your supply chains and, once again, resilience must be planned throughout. How resilient is your procurement strategy to global political change?
  5. Reputational/market: with a move toward greater transparency, the shortening of media cycles, and the prevalence and speed of social media coverage, damage to a project’s or organisation’s reputation can be swift and crippling. Lagging behind your competitors can quickly give them the opportunity to differentiate their products or services within the market. And stories involving lapses in sustainability or blatant greenwash, human rights abuses, modern slavery and suppressed research circle the world in hours. The damage to one organisation’s reputation from problems within its supply chain or procurement processes can be overwhelming.

A global risk, as reported by the Global Slavery Index

As the ABC reported last month, the 2016 Global Slavery Index has found that more than 45 million people are living in modern slavery around the world, with two-thirds reported in the Asia-Pacific region. Whilst Australia is listed as one of the countries taking most action to tackle modern slavery, our supply chains put us at the centre of this issue. The Global Slavery Index, an initiative of human rights group the Walk Free Foundation increased its estimate of people born into servitude, trafficked for sex work, or trapped in debt bondage or forced labour to 45.8 million from 35.8 million in 2014.

The founder of Walk Free, Australian mining billionaire and philanthropist Andrew Forrest, said the rise of nearly 30 per cent was thanks to better data collection. He encouraged organisations to verify their own supply chains for worker exploitation, explaining that he had found thousands of people trapped in slavery making goods for his company Fortescue Metals Group.

“But I’ve had some of some biggest entrepreneurs in the world look me in the eye and say ‘I will not look for slavery in case I find it’,” he stated at the launch of the 2016 Index.

Can you state definitively that there is no slavery anywhere within your supply chains?

External and internal risks

So with all of these risks being very real ones, whether you’re a sole trader or building a multi-billion dollar infrastructure project, how can you start to manage them? Well, it’s probably going to be most useful to separate these issues into external risks (those outside your direct control) and internal risks (those within your direct control).

External risks may seem overwhelming, but it’s better to make a start than to continue to bury your head in the sand. To begin with, you can ask questions of companies within your supply chains about those five areas outlined, discuss the issues with a colleague or industry peer, find out how other organisations manage those risks, talk with relevant industry associations such as the Green Building Council of Australia or Infrastructure Council of Australia, and speak to experts such as Good Environmental Choice Australia or Global GreenTag.

Whilst you cannot necessarily control them, it’s a fallacy that you can’t influence the external risks in your supply chain. As Sam Walton, founder of US retail giant Walmart said, “there is only one boss – the customer – and he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

You can still influence external companies by taking your money elsewhere, if you have to; at least start asking questions, at most place your business with another supplier.

Internal risks can appear easier to tackle, but this is also where you’re more likely to step on the toes of people you know whilst challenging the status quo, and that can take some courage. If you make the end result about a sustainable business model, building organisational resilience and ensuring risks are minimised and efficiencies maximised, this may be the language to speak: ‘play the ball and not the man’ (or woman, depending on the sport idiom you prefer). That way you can make it about the organisation, not a particular person’s long-entrenched process.

Again, you need to start having conversations about those five areas of risk already outlined, and discussing what each could mean to your products, processes and projects.

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