What is Supply Chain Risk: Types, Examples and How to Mitigate Them?

Global supply chain disruptions were seen during the Russia-Ukraine war. When two of the world's largest exporters were at war, they stopped their exporting operations. This resulted in halting crude oil and wheat, disrupting the US, UK, and APAC regions. After that, the world learned about the world's supply chain risk.

Thus, the "supply chain risk" gained prominence after 2022. This guide will give a fresh perspective on dealing with the risks you may face in your supply chain operations.

What is Supply Chain Risk?

The world economy depends on demand and supply operations, which are prone to disruption. Natural or non-natural disruptions that disturb an organization's core, network, and economy are identified as Supply chain risks. 

A global survey states that political uncertainties, natural disasters, and economic issues are the top supply chain risks in the current global economy. 

Importance of supply chain risk management

Supply chain risk management looks after the risks of supply, process, demand, collaboration, logistics, finance, and the environment. A 2021 survey reveals that the loss of revenue due to supply chain disruption has reached to $182 million annually. 

The concept of risk identification, assessment, and formulation of mitigation strategies comes within the context of risk management. That is why you must learn about supply chain risk and how to tackle it if you are dealing with supply chain issues. 

Types of supply chain risks

As seen in the image above, the supply chain risks are classified into external and internal risks, further subdivided into various risks. 

Internal or Operational Risks: These are risks that come from within your operations. It could be things like:

• Problems with your processes (e.g., production delays).
• Capacity issues include running out of resources to meet demand.
• Quality problems or delays caused by internal inefficiencies.

External or Disruption Risks: These come from outside your business and are more challenging to control:

• Natural disasters, like floods or earthquakes, can halt operations.
• Political changes or regulations might add unexpected costs or stop operations.
• Economic downturns or terrorist attacks could create instability.

Risk Based on the Flow in Supply Chain: Supply chains rely on three types of flows—physical goods, information, and finances. Each carries its risks:

• Physical flow risks: Damages to goods in transit or delays in delivery.
• Information flow risks: Misinformation or lack of proper coordination between partners.
• Financial flow risks: Cash flow problems, delayed payments, or financial crises in the supply chain.

Specific Risks You Might Face:

• Supply-side risks: If a supplier fails, it can halt your ability to deliver. For example, Toyota once shut down production because one supplier had a fire. Other risks can include supplier bankruptcy, delays, price hikes, or poor quality.
• Process-side risks: Issues like production breakdowns, labor strikes, or outdated technology can disrupt operations. Even small hiccups can create big delays.
• Demand-side risks occur when customer demand is unpredictable or when orders are delayed or incorrect. Poor forecasting or a lack of understanding of market trends can amplify these risks.
• Logistics Side Risks: Problems in transporting goods, like damaged cargo, poor packaging, or delays caused by natural disasters, can cripple the flow of goods.
• Collaboration Risks: Working with partners can be tricky. A lack of trust or miscommunication between you and your partners can slow everything down or lead to losses.
• Financial Risks: Money problems can hit hard. This includes delayed payments, rising costs, or even an economic crisis in your network that impacts your ability to deliver.
• Environmental Risks: These are rare but can be catastrophic. Think about floods, political instability, or sudden changes in regulations that disrupt everything overnight.

Case Study: Supply Chain Vulnerabilities Exposed by Natural Disasters

In October 2024, Hurricane Helene disrupted the global semiconductor supply chain by halting ultra-pure quartz mining in Spruce Pine, North Carolina, which supplies 90% of this crucial material for silicon chip production. Flooding and infrastructure damage forced companies like Sibelco to stop operations, threatening a shortage of silicon wafers essential for electronics and AI servers. While major manufacturers have stockpiles, extended delays could lead to a global supply crunch, raising prices and causing industry-wide disruptions.

Ways to Manage Supply Chain Risks

We are taking the case of Nissan during one of the most devastating crises they ever faced. After that, we'll draw practical lessons on risk management that you can apply.

On March 11, 2011, Japan was hit by a 9.0-magnitude earthquake, followed by tsunami waves. This disaster caused unimaginable destruction, including a meltdown at three nuclear reactors in Fukushima. Nissan suffered the maximum damage; their six production facilities and fifty critical suppliers were severely damaged, resulting in a loss of production capacity equivalent to 270,000 vehicles.

Yet, despite this massive disruption, Nissan had implemented its risk management measure, and its recovery was remarkable. Within six months, its production in Japan dropped by only 3.8%, compared to a 24.8% industry-wide decline. By the end of the year, Nissan's production had increased by 9.3%, while competitors had faced a 9.3% drop industry-wide.

How to Mitigate Supply Chain Risk

Taking the learning from Nissan's risk management strategy, we have also formulated a risk management plan for this; you have to: 

1. Prepare in Advance with a Risk Management Plan: Nissan had robust systems before the disaster, including an earthquake emergency response plan, a business continuity plan, and disaster simulation training. You can identify potential risks early and then plan out for them. This means you must conduct drills with your team to simulate worst-case scenarios.
2. Identify and Act on Risks Quickly: Now, you do not have to wait for disruptions to spiral. Your supply chain monitoring should be in real-time, and systems should be in place to act immediately.
3. Empower Local Decision-Making: Nissan allowed local teams to make decisions without waiting for lengthy approvals from headquarters. This saved time and kept operations moving. Similarly, you also need to trust your team on the ground. Also, it would help if you empowered them to make quick decisions during crises so that problems don't escalate.
4. Build Flexibility into Your Supply Chain: Nissan's supply chain was decentralized but retained firm central control when needed. They also simplified product lines, making it easier to adjust operations during disruptions. The takeaway for you is to create a flexible supply chain. Diversify suppliers, streamline processes, and keep alternative routes or sources ready.
5. PPRR Model (Prevention, Preparedness, Response, and Recovery): This model effectively prevents disruptions. However, you need to take time to learn how it will resonate with your own supply chain network. 
6. Financial Stability Monitoring: Suppliers are crucial to your operations, and their financial troubles can directly affect you. Keep an eye on their financial health to avoid sudden surprises like bankruptcy. For example, reviewing financial reports or industry news about key suppliers can help you spot risks early. If you notice red flags, you can plan alternatives before their issues disrupt your supply chain.
7. Inventory Buffers: Buffer inventory is like a safety net—it helps you keep running even when something goes wrong. Having some extra stock for critical materials ensures you can continue operating during delays or shortages. Analyze your supply chain to decide how much additional inventory you need. This way, disruptions won't force you to stop production or disappoint customers.

Best Practices for Supply Chain Risk Management

Considering the numerous vulnerabilities an organisation is exposed to, it is next to impossible for a company to mitigate all the risks; instead, one should not even aim for it. So, does that mean you should leave your supply chain hanging? Who said that?

As a CFO, you should always strive to implement the best practices to bring the risks associated with your supply chain to a manageable level. Here are some of those practices which you can incorporate while formulating your supply chain risk management strategy:

Manage natural disasters proactively: You’ve already seen how natural disasters, like earthquakes or pandemics, can disrupt supply chains for extended periods.

1. To better manage environmental risks, diversify your suppliers (multi-sourcing) to avoid dependency on one source and consider nearshoring suppliers closer to your operations for faster delivery.
2. Stress-test your supply chain regularly to identify hidden vulnerabilities and build inventory buffers to prepare for high-risk periods like hurricane seasons. Invest in harmonized technology across your network to enable flexibility and better communication during disruptions.

Invest in technology to improve 

You can leverage IoT sensors for real-time shipment tracking and service portals for automated updates on inventory levels and delivery schedules. Both these active investments solve issues like shipment delays, missed customer expectations, and lack of visibility during the last mile of delivery. This practice is highly beneficial because it lets you stay informed about your supply chain’s performance and act quickly to avoid disruptions.

Focus on freight carrier metrics to improve efficiency

Let’s think about whether tracking freight carrier metrics is necessary. On the one hand, watching transit times and stop durations helps ensure your deliveries are on time and keeps your customers happy. But some might say you can trust your carrier and focus on other things. The problem is that if a carrier is slow to load or takes inefficient routes, it can delay shipments and increase costs. It is better to track these metrics and catch problems early

Logistics contingency plan all the time

You should have a logistics contingency plan if you’re serious about avoiding significant disruptions. Map out your supply chain to see where the risks are, like political or geographic issues. Audit your suppliers and logistics providers to ensure they have their disaster plans after this. Diversify your suppliers, so you’re not dependent on just one. Set up a crisis response team to act quickly during emergencies. Document all processes clearly so your team knows what to do.

After reading all the essential aspects, the lesson is that you must deeply understand these risks and then create a plan to handle them. The main point is that while supply chain risks can't always be avoided, they can be managed. With this knowledge, you can take steps to protect your business and keep things running smoothly, even when challenges arise.