Risk Factors and Risk Management in Supply Chain

As uncertainties and risks increase in supply chains, which have transformed into a more complex system with globalization, due to the impact of various socioeconomic agendas, this situation may reflect negatively on the overall economic picture. For this reason, businesses prepare risk management plans to manage uncertainties and risks related to the supply chain to the extent that they anticipate them and form all their activities in line with these plans according to risk management. We have compiled for you the possible risk factors that businesses may face, risk management that affects each player in the supply chain ecosystem in a chained way, and the importance of the supply chain and risk management.

Definition of Supply Chain

The supply chain is a multidirectional chained system that covers all economic activities from the supplier to the end customer, including all production, transportation, distribution, and trading processes that take place to provide supply at the right time, in the right place and at a price that meets the demand and needs of customers. In other words, the supply chain is the whole of all stages that create value in the processes of creating and delivering demand-oriented supplies for a product or service and all the elements involved in this process.

Importance of Supply Chain

The supply chain encompasses a wide range of processes that all products and services go through until they are transformed into the economy, from the acquisition of raw materials to their distribution and transfer to the points where they are needed; therefore, it is a vital ecosystem involving different players involved in the phases from the extraction of raw materials to their processing and transformation into the economy. Crises or disruptions in this ecosystem can be caused by various internal or external causes that can disrupt the business process, leading to crises in a variety of issues on a global scale. All of the manufacturing operations processes of a business are affected by all the chained processes in the supply chain that create value during the distribution of raw materials, semi-processed products, finished products, and delivery of finished products to the final consumer.

Importance of Risk Management in Supply Chain

As international trade accelerates with digital transformation, the supply chain is fundamental to every link in the global economic system. Tensions that may arise in each link may be reflected in the supply chain, even if they are on different issues. For example, a restriction in the distribution of raw materials due to an escalating political tension between two countries may cause global trade in this energy to become more expensive and products and services in the supply chain, from raw material imports to the end user, to become more difficult to access.

Risks and uncertainties arising from the problematic or uncontrolled functioning of the operational processes of the enterprise, or from completely external issues, create the need for risk management in enterprises. Businesses and supply chain leaders with strong risk management are one step ahead in overcoming problems and maintaining and improving overall performance. In businesses that can strategically manage risk, employee motivation and therefore internal reputation increases.

Risk Factors in the Supply Chain

Risk factors in the supply chain are categorized into two groups as external and internal factors. External supply chain risks are those arising from external causes, while internal factors are risk factors arising from the business. External factors are risk factors that are more difficult to predict than internal risk factors and can be analyzed in four groups:

***Supply Risk: ***It is the risk capacity of the negative effects that the risks arising in the linked enterprises may have on another enterprise due to the supply chain connection. It can take the form of a wide range of crises such as bankruptcy, delayed delivery, delayed payments, or delayed transportation.

***Demand Risk: ***Demand risks develop because of miscalculation of product demand. The risk increases as demand becomes more difficult to predict. Strategic risk management planning and its consistent implementation through various solutions is needed to create insights into unpredictable demand.

***Environmental Risks: ***Environmental risk in the supply chain is the risk that environmental factors such as extreme weather conditions, natural disasters, and emergencies that may cause health problems for workers and disrupt the functioning of the supply chain may disrupt operations. Adverse socio-economic, political, or administrative impacts can also be counted among environmental risks.

***Business Risks: ***Business risks arise when unexpected changes occur in one of the organizations relied upon for the smooth operation of the supply chain, such as the acquisition or sale of a supplier company.

On the other hand, internal risk factors are risks that are more predictable by risk assessment software and analytical programs:

Production Risks: Refers to the possibility of a significant interruption of all or part of the operations in the workflow.

Business Risks: risks arising from the disruption of some of the personnel, management, reporting and other key elements involved in business processes.

Planning and Control Risks: Risks arising from production and management problems because of incorrect determinations, estimates or assessments on planning and control.

Mitigation and Emergency Risks: Unexpected risks that may arise due to the lack of crisis management or distorted planning of the business or in the absence of a contingency plan for supply chain disruptions.

In the supply chain risk management process, risk analyses and forecasts should be studied regularly and a strategic crisis plan should be prepared accordingly. In addition to communication crises, businesses should also plan in detail the communication policies to be carried out in other crisis situations. Businesses that have a comprehensive established and monitoring process and businesses that work with certified suppliers can eliminate many risks. In addition, rational solutions such as having a successful KPI system with the supplier and measures such as getting expert support can be listed among the things that can be done strategically to reduce possible risks. At this point, what is important is that the business gains the ability to develop and maintain strategic plans specific to its own environmental factors with its own unique qualities. Of course, although external factors affecting the supply chain are not as predictable as internal factors, it may be useful to conduct a preliminary study on crisis scenarios that can be prepared for possible situations.

Sources: *https://www.forbes.com/sites/garthfriesen/2021/09/03/no-end-in-sight-for-the-covid-led-global-supply-chain-disruption/?sh=5c4eaf7d3491 Access Date: 22. 12. 2022 *