Any business that wants to be successful needs to know how to manage risk. This is especially true for businesses that operate in a global supply chain, as they often deal with a number of different suppliers, manufacturers and customers in different parts of the world.
Many organisations worldwide have long been familiar with the importance of supply chain risk management strategies. They’re essential to maintaining business continuity and ensuring the resilience of the organisation and its operations to disruption risks.
The COVID-19 pandemic has only reinforced the value of supply chain risk management. According to a recent Gartner report, countless businesses are still recovering from the impact of the coronavirus crisis. The issues of resilience and proactive preparedness are among the top drivers of risk management planning.
The 2021 Gartner Supply Chain Risk and Resilience Survey shows that 79% of organisations prioritise resilience and risk management, adding that by 2025, supply chain risk management will be a critical success driver for over 50% of organisations.
Source: Gartner
Supply chain risk management is especially important for the UK construction and built environment sectors, which face challenges such as soaring inflation, labour shortages and new legislation changing standard practices.
Related Reading: 8 UK Construction Industry Trends Of 2022 To Watch Out For
What Is A Supply Chain Risk Management Strategy?
Supply chain risk management (SCRM) is a collection of practices focused on identifying and mitigating risks throughout the supply chain. As one study explains, “SCRM helps supply chains to cope with vulnerabilities both proactively by supporting robustness and reactively by supporting agility.”
From natural disasters to economic downturns, many different risks can affect the supply chain. An effective supply chain risk management strategy should identify the risks most likely to affect your organisation and develop protocols to mitigate them.
How to Manage Risk: 3 Risk Management Strategies To Consider
Supply chain risk management is a complex and ever-changing field, but it’s essential for businesses that rely on complex or global supply chains. Multiple risk management strategies enable you to protect your company from disruptions and maintain business continuity.
Risk Management Strategy #1: Diversify Your Contractors And Suppliers
Diversification in the supply chain means spreading your supplier base across multiple contractors/suppliers, products and/or regions. Diversification can help protect your business from disruptions caused by depending on any one supplier.
According to research by Deloitte, 69% of chief financial officers (CFOs) are planning to increase the diversification of their supplier base over the next three years through regional sourcing and multisourcing changes.
Source: Deloitte
CHAS Tip: Your approach to diversifying your supply chain will depend on your specific needs. But there are a few general tips to keep in mind:
- Consider multiple suppliers: Don’t put all your eggs in one basket. Sourcing from multiple suppliers can help you reduce the impact of any one supplier going out of business or facing other disruptions.
- Consider multiple regions: Sourcing from suppliers in multiple regions can help you reduce the impact of political instability or natural disasters in any one region.
- Balance cost and risk: Diversification comes with added complexity and cost. For example, working with new suppliers means doing additional work to ensure they align with your corporate governance and corporate social responsibility (CSR) goals. Consider the trade-offs between cost and risk when making decisions about your supply chain.
Risk Management Strategy #2: Consider Long-Term Contracts
Another risk management strategy is to sign long-term contracts (six to 12-month contracts) with your contractors and suppliers. This strategy offers your supply chain stability and predictability, protecting you from risks like fluctuating prices.
However, long-term contracts also come with their share of unique issues. For instance, the terms of your contract may leave you no choice but to stay with a contractor/supplier even if they miss deadlines or overpromise and underdeliver.
CHAS Tip: Our recommendation? Ask these questions when weighing the value of a long-term contract:
- How will my customers be affected if a relationship with a contractor/supplier doesn’t work out?
- What do I have to gain or lose by awarding a long-term contract to a particular contractor/supplier?
- What are the pros and cons (e.g., pricing, after-sales support) of a long-term vs short-term contract with a contractor/supplier?
Risk Management Strategy #3: Conduct Contractor Or Supplier Management
Managing supplier relationships is another important component of supply chain risk management. Relationship management is a multi-faceted strategy that encompasses everything from building trust to establishing clear lines of communication to resolve issues quickly if they arise.
CHAS Tip: One way to simultaneously improve your relationship with contractors and protect your supply chain is to set compliance levels for your entire contractor/supplier base. This is where third-party accreditation providers like CHAS come in.
We help construction clients increase and meet their compliance targets by working with their contractors/suppliers to confirm their compliance in key areas of supply chain risk management. These risk areas include health and safety, environmental impact, corporate social responsibility and modern slavery, just to name a few.
Related Reading: 12 Key Areas of Risk Management in Construction
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For instance, if most of your contractors have health and safety accreditation, CHAS can help them comply with higher-level accreditation schemes like PAS 91 and the Common Assessment Standard — the UK construction industry’s pre-eminent prequalification system.
Accreditation offers a win-win situation for all parties:
- Firstly, increasing your supply chain compliance level enables you to prequalify for contracts with more stringent requirements. For example, businesses applying for government contracts with a value of over £5 million per year must demonstrate their commitment to achieving net-zero emissions by 2050. In other words, you must embed environmental management in your supply chain and subcontractors’ practices.
- Secondly, your subcontractors also reap the rewards of increasing their supply chain compliance standards. It enables them to prequalify for more work opportunities and reach out to potential construction clients looking for suitably qualified businesses.
Related Reading: How to Build a Robust Supply Chain Compliance System
While these three risk management strategies only scratch the surface of what you can do to protect your supply chain, they should serve as a great starting point for you to plan your next steps in the near future.
Be sure to follow the CHAS blog to find more guides and insights on managing risk in your supply chain. Become a CHAS client to find suitably qualified contractors or suppliers with Verified Supplier, SSIP, PAS 91 or Common Assessment Standard accreditation.
