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Ebook 2nd Edition SCRM For Dummies
Ebook 2nd Edition SCRM For Dummies
by Daniel Stanton
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Supply Chain Risk Management For Dummies®,
riskmethods 2nd Special Edition
Published by
John Wiley & Sons, Inc.
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Table of Contents
FOREWORD...........................................................................................................v
INTRODUCTION................................................................................................ 1
About This Book.................................................................................... 1
Icons Used in This Book........................................................................ 2
Where to Go from Here........................................................................ 2
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Optimizing Risk Assessment.............................................................. 24
Understanding Your Sub-Tiers.......................................................... 25
Using Collaboration to Manage Risk................................................. 26
GLOSSARY........................................................................................................... 41
iv Supply Chain Risk Management For Dummies, riskmethods 2nd Special Edition
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Foreword
A
s supply chains have become front-page news, at no other
time in recent history have consumers and businesses
alike experienced the importance supply chains play in
their daily lives.
Foreword v
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Of course, without proper planning and the use of technology to
monitor, identify, assess, and mitigate risks, companies of all
sizes leave themselves exposed to the ongoing chaos that takes
shape in the variety of risks that remain in our supply chains.
Since establishing world-class supply chain risk management
will remain a key success driver in the new normal, more organi-
zations will need to redouble their efforts of dedicating the proper
mix of people, processes, and technology.
Sincerely,
Constantine Limberakis
vi Supply Chain Risk Management For Dummies, riskmethods 2nd Special Edition
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Introduction
E
very product has a supply chain. These supply chains are
complex networks of companies from around the world that
depend on one another to efficiently create the things that
we value, and deliver them when and where those things are
needed. You depend on your suppliers. And your customers
depend on you!
In this book, you learn the basics of supply chain risk manage-
ment, and how companies are using SCRM systems to create more
resilient supply networks.
Introduction 1
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»» Automating supply chain risk management (Chapter 4)
»» Making the business case for supply chain risk management
(Chapter 5)
»» Ten keys to creating a risk-aware enterprise (Chapter 6)
The Tip icon marks tips (duh!) and shortcuts that you can use to
make SCRM implementations easier.
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IN THIS CHAPTER
»» Addressing the growing frequency of
supply chain disruption
Chapter 1
Managing Risk in the
Supply Chain
S
upply chains are complex systems made up of people,
processes, and technology that deliver something of value to
a customer. You depend on your suppliers to deliver the
products and services you need when you need them. And your
customers are counting on you to meet their needs, too.
Throughout the supply chain, risk management helps to ensure
that each company can deliver valuable products and services to
their customers, even when things don’t go as planned.
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Continuous improvements in logistics and high-speed
communications have made it easier than ever to do
business globally. This also exposes companies to risks
all around the world.
»» Outsourcing. Companies often choose to focus resources
on their areas of core competency and outsource other
business functions to suppliers who specialize in those
areas. As a result, companies become extremely reliant
on their suppliers for all of their non-core functions.
»» Lean. Companies aim to streamline their supply chain
operations by increasing the speed of their processes and
reducing inventory. Examples of this include JIT (just-in-time)
inventory strategies that deliver products exactly when
they’re needed. A disadvantage of Lean is that less inventory
is available to act as a buffer against disruption.
»» Customer expectations. Customers are becoming accus-
tomed to the convenience of making online purchases, and
having products delivered to them quickly and cheaply.
When companies fail to meet customer expectations, they’re
at risk of suffering reputational damage from negative online
reviews and posts on social media sites.
»» Climate change. Changes in the earth’s climate are leading
to an increased frequency and intensity of storms, floods,
and wildfires. It also means the emergence of new supply
chain regulations around the world, and new ways of
assessing how businesses are managing risks from an
operational perspective; for instance, the emergence of
carbon footprint management.
SCRM is not just about avoiding problems. It can drive direct and
measurable value for procurement and supply chain organiza-
tions by improving business continuity, supply chain visibility,
corporate social responsibility (CSR), environmental, social, and
4 Supply Chain Risk Management For Dummies, riskmethods 2nd Special Edition
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governance (ESG) performance, regulatory compliance, and sup-
plier relationship management.
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Assessing new suppliers only
during onboarding
Evaluating suppliers during onboarding is great, but things
change. Suppliers can get into financial trouble, and labor dis-
putes can arise from seemingly trivial issues. Even the likelihood
of a natural disaster affecting a plant might increase because
of changing weather conditions. Or the supplier’s own internal
strategy might increase the risk for the buyer.
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capacity to meet your demand. Timing and capacity are critical
when you’re counting on a backup supplier to protect your supply
chain from disruption.
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Aligning Demand with
Supply Management
Supply chain risk management is useful for any business that
relies on external resources for value creation, because their sup-
pliers and vendors also face risks. One example is the microchip
shortage and its impact on upstream supply chains. The global
microchip shortage in 2021 has continued to wreak havoc on car
manufacturing in 2022. Dealer lots are seemingly empty due to
supply chain issues where millions of cars have never gone into
production.
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IN THIS CHAPTER
»» Exploring the structure of your supply
chain
Chapter 2
Building a Supply Chain
Risk Management
Process
S
upply chain risk management involves monitoring complex
global business relationships. Companies rely on a smooth
flow of money, products, and information through factories,
distribution centers, ports, and vehicles on every continent. If any
of these flows are interrupted, the result is a cascading series of
expensive problems. To effectively protect your supply chain from
disruption, you need to identify the points of vulnerability, ana-
lyze the risks that could occur, and develop action plans.
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many companies initially prioritize a subset of their total supply
base, and then add the rest of their suppliers to the risk manage-
ment system as quickly as possible and feasible.
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Mapping Your Supply Chain
Supply chain risk management begins with defining and mapping
out what your supply chain really looks like. A good place to start
is by creating a list of risk objects. For example, your company’s
offices, factories, and distribution centers are all supply chain risk
objects. You can also build a list of your suppliers along with their
physical locations. Other common risk objects, or nodes, include
transportation infrastructure such as highways, ports, canals,
and airports.
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potential threats. In other words, by sharing information, you’re
able to help suppliers do a better job of managing their own sup-
ply chain risks.
»» Natural disasters
»» Accidents or explosions
»» Sabotage, terrorism, crime, or cyberattacks
»» Civil unrest, political uncertainty, and wars
»» Labor unavailability and shortage of skills
»» Sustainability, compliance issues
Consider all types of risk, whether external, internal enterprise,
supplier, or distribution risks. High-level categories include
financial, reputational, natural hazard, geopolitical, cyber, and
man-made risks.
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Assessing Your Risks
The simplest way to determine how important a risk is to your
supply chain is to look at two factors:
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Risk assessment data can be used to create risk scorecards. Put
simply, scorecards assign values for each risk area based on the
likelihood that such events will happen. Scorecards are useful for
integrating risk assessments into other business processes. For
example, a risk scorecard can be used in procurement processes
such as contract award decisions or supplier onboarding. You can
read more about risk scorecards in Chapter 4.
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CASE STUDY: AN EARTHQUAKE
ACTION PLAN
While implementing a supply chain risk management process, a
global telecommunications provider discovered that a key supplier’s
production plant was located in an area with a high earthquake risk.
The enterprise’s executives decided to mitigate the risk of disruption
by establishing an alternative source and taking out contingent busi-
ness interruption insurance. The company also developed an action
plan that would be implemented by the lead buyer if an earthquake
occurred. The plan included the names and phone numbers of the
people who should be contacted to assess any damage and who
would determine how the situation would impact the supplier’s ability
to continue operating. The plan also provided contact information for
the alternative supplier, and, if needed, the buyer could secure capac-
ity and place substitute orders.
»» Natural hazards
»» Political situations
»» Sanctions
»» Labor disputes and strikes
Mitigating supply chain risks generally requires investment and
integration with other business processes, so it is important to
have the support of top-level management. Many companies
benefit from integrating risk-reduction practices into their sup-
plier evaluation and development programs. As a result, they’re
able to automate user workflows, assign tasks, and keep a record
of activities for compliance authorities.
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Visualizing Threat and Impact
A useful tool in supply chain risk management is to visualize or
plot data on an easy-to-understand graph or chart. Figure 2-1
shows risks plotted based on their potential impact (the vertical
axis) and the probability that they will occur (the horizontal axis).
Add colors to represent the level of risk and impact. In the graph
in Figure 2-1, the risks in the darker area will be given priority.
Symbols add even more data to the visualization. For example,
different shapes represent risks to different parts of the supply
chain, and you can change the size of an object to illustrate the
potential cost of a disruption.
A graph makes it easy to pinpoint the critical risks that have both
a high probability and a high potential impact. Such graphs sum-
marize the risks associated with one part of a supply chain, such
as a supplier or category. Or combine that data to create a risk
visualization for your entire supply chain.
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IN THIS CHAPTER
»» Understanding the need for supply chain
visibility
Chapter 3
Deciding Which Risks
to Monitor
Y
ou can’t fix a problem if you can’t see the problem. To be
able to determine whether your supply chain is safe or at
risk, you need current, accurate information about what’s
happening at your own facilities, and at your suppliers’ locations.
Having data about key points along the supply chain is also help-
ful, such as highways, ports, and airports. Beyond monitoring
physical sites, you also need to track the status of information
systems, and watch for threats that could affect people, too.
Supply chain visibility helps you respond to threats quickly, and
makes your supply chain more resilient.
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Rather than jumping straight into data collection, it often helps to
start by creating categories that describe how a risk could affect
your supply chain. For example, here’s a list of risk categories
that many companies monitor:
Under these high-level risk categories, you can add more detailed
risk subcategories. For example, the operational risk category
could include subcategories for supplier performance and quality
risks. The decision as to which risks should be included in a risk
scorecard is based on criteria such as:
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infrastructure, and might affect several suppliers at once. Addi-
tionally, risks such as wars and economic disruptions can affect
entire regions. As the coronavirus demonstrated, disruption
caused by pandemics can also spread across several risk catego-
ries, and disrupt global markets over a long period of time.
»» Financial risk
• Ownership structure
• Current ratio
• Credit rating
• Bankruptcy
• Key employee stability
»» Operational risk
• Delivery reliability
• Disasters at supplier site
• Labor negotiations and disputes
• Quality
• Health and safety
»» Market risk
• Patents and intellectual property rights
• Low-cost supplier threat
• Currency exchange rates
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»» Image and compliance risk
• Labor practices
• Environmental sustainability
• Hazardous substances
• Supplier corruption or bribery
• Cyberattacks
Selecting the right KPIs can provide visibility about whether
a supply chain is adhering to chosen metrics, and ensure that
people are quickly alerted to risks that could lead to a supply chain
disruption.
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IN THIS CHAPTER
»» Defining your risk management data
requirements
Chapter 4
Automating Supply
Chain Risk Management
S
upply chain risk management involves collecting and ana-
lyzing data efficiently and accurately so that the people
involved can understand the potential impacts and respond
quickly. Monitoring all the risks that have been identified requires
the analysis of such large quantities of data that it would be
impossible to perform manually. Automating this process using
artificial intelligence helps connect the right people with the
information they need, when they need it, so that they can work
together to protect your supply chain.
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Supply chain risk information includes numerous third-party
sources, such as government lists, social media, and news outlets.
This data needs to be analyzed for relevance by using logic to filter
“noise” from true risk signals. It must be standardized so that it
is easier to interpret, communicate, and integrate into other sup-
ply chain processes. Examples of important risk data from various
sources, along with their ranking formats include:
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a supply chain. Many of those data points need to be tracked in
real time.
Because of the volume of data and the speed with which this data
needs to be processed, it makes sense to automate as much of
the supply chain risk process as possible. Automation can reduce
the cost of risk monitoring and alerting, while also increasing the
speed at which critical information is received and processed.
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potential data sources across different risk types into existing
enterprise IT-systems. Such solutions standardize data and inte-
grate it into risk profiles.
The better option for companies that need a robust SCRM solution
is to purchase commercial software that has the required features,
and will be supported by a dedicated vendor. Some of the ques-
tions to ask when evaluating SCRM solutions include:
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consuming and labor intensive. Adopting automated risk surveys
can improve the efficiency of this process.
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Using Collaboration to Manage Risk
In a perfect SCRM world, every company would voluntarily share
risk information with their customers and suppliers. In reality,
there are significant barriers to information sharing:
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IN THIS CHAPTER
»» Estimating the potential cost of a supply
chain disruption
Chapter 5
Creating the Business
Case for Supply Chain
Risk Management
I
mplementing a technology-based solution for supply chain risk
management is a business decision that needs to be framed in
terms of costs and benefits. This chapter will help you deter-
mine the value that effective risk management can provide to
your organization’s stakeholders, as well as to your customers
and suppliers.
CHAPTER 5 Creating the Business Case for Supply Chain Risk Management 27
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business case for automating your SCRM system requires a differ-
ent approach than most other business decisions.
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Many companies choose to initially focus on three categories
when assessing the benefits of supply chain risk management:
CHAPTER 5 Creating the Business Case for Supply Chain Risk Management 29
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4. Present the plan. Describe how to achieve the supply chain
risk management vision. The goal of this step is to explain the
proposed solution and what is required to establish it (a
high-level adoption plan).
5. Clarify the costs and benefits. The goal of this step is to
explain the investment and the return on investment, with
financial and non-financial costs and benefits included, along
with a plan for tracking those benefits.
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supply chain disruption, companies with a resilient supply
are able to draw customers away from less resilient
competitors.
»» Advancing brand reputation. Supply chain risk manage-
ment can reduce the risk of reputational damage caused by
product shortages. It can also reduce the cost of product
recalls or advertising aimed at reassuring customers.
When calculating the cost of risk, use hard numbers when possi-
ble. In some areas (such as avoidance of catastrophic risk events
or consequences), estimating the value of something that did not
happen is common. In other cases, there will be numbers availa-
ble to support both specific and ongoing investment in risk man-
agement capability and tools.
CHAPTER 5 Creating the Business Case for Supply Chain Risk Management 31
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Managing Compliance Risk
Governments around the world are implementing new regula-
tions that affect the supply chains. Increasingly, regulations in
the areas of environmental, social, and governance (ESG) prohibit
violations of human rights, health and safety, and labor laws.
Violating these regulations can result in costly fines, and worse.
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IN THIS CHAPTER
»» Deciding which supply chain risks to
monitor
Chapter 6
Ten Keys to Creating a
Risk-Aware Enterprise
E
very company depends on having a reliable supply chain. To
survive and thrive in the current environment, businesses
need to collaborate with customers and suppliers to imple-
ment effective supply chain risk management. Automated SCRM
systems can help an organization turn risk into a competitive
advantage, gain customer trust and market share, and protect its
brand. This chapter explains ten keys to assessing a company’s
approach to SCRM and determining which actions to take next to
become a proactive risk-aware enterprise.
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»» Suppliers with a large impact on revenue
»» Suppliers with unique technology and patents
»» Suppliers with specific ownership structures
»» Suppliers tied to customer specifications
»» Suppliers in specific regions
Ideally, companies quickly expand monitoring to include all seg-
ments. For a total view of risk, also consider other supply chain
elements:
»» Direct suppliers
»» Sub-tier suppliers
»» Your own facilities
»» Logistic hubs
»» Customers
»» Countries
Chapter 2 explores how to map your supply chain.
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Monitoring Risks
Risk monitoring provides the information you need to make good
decisions more quickly. An early warning system is important
because the sooner you identify risk, the more options you have to
respond to it. A proactive approach to risk identification will also
include structured contingency planning, along with notifications
and updates. You need to evaluate the risk information required
against what is available, along with its importance. Some of the
aspects to consider when evaluating a risk identification process
include:
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Other parameters that can be useful when evaluating how to
respond to a supply chain disruption include:
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Integrating Processes
Supply chain decisions are often spread throughout an organi-
zation. When you integrate supply chain risk management into
other organizational processes, you maximize the value it can
provide. Processes that can be integrated with SCRM include:
»» Spend analytics
»» Sourcing
»» Supplier evaluation qualification / management
»» Purchasing dashboards and reporting
»» Category / commodity management
»» Compliance and corporate social responsibility
»» Supply chain planning
»» Enterprise risk management
»» Transportation management
Chapter 2 has the lowdown on building a supply chain risk man-
agement process.
Managing Change
Incorporating supply chain risk management into an enterprise
usually involves making significant changes to how a business
operates and how important decisions are made. To implement
these changes successfully, you need to address issues such as:
Read Chapter 5 for more tips on getting executive buy-in for sup-
ply chain risk management.
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Securing Supply
One of the keys to building a resilient enterprise is to ensure that
the supply chain does not interfere with a company’s ability to
meet customer commitments. A proactive strategy can be used to
prepare for risks by securing supply based on predictive insight.
For example, if a company can anticipate what its customers are
going to buy, then procurement and supply chain managers can
purchase safety stock inventory to provide a buffer against pos-
sible shortages, or secure capacity from suppliers in advance.
Such preparedness is a requirement for ensuring the continuity of
business operations despite supply chain disruption.
As companies evolve, the supply base tends to grow and the com-
position changes. As new threats emerge and pressures evolve,
the sourcing process must continue to seek approaches to proac-
tively master supply risks in areas including:
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»» Image/Compliance. Based on violations of environmental
regulations, labor laws, or anti-corruption rules
»» Quality. Based on the process maturity and product quality
of a supplier
For more on the business case for automating supply chain risk
management, head to Chapter 5.
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WHY MANAGING RISK IS
ESSENTIAL FOR SUPPLY
CHAIN RESILIENCE
Supply chain resilience is the ability of a supply chain to withstand
negative impacts and recover quickly from disruptions. Now, more
than ever, companies are realizing the need for resilient supply
chains, and are acting on this demand.
Today, efficiency is not the only metric that matters for success.
Supply chains also need to be resilient, so that they can continue to
function even when surprises occur. Lots of strategies can make sup-
ply chains more resilient, such as reducing single points of failure,
holding buffer inventory, and shortening lead times. While some of
these strategies might add cost to the supply chain, they create value
by reducing the probability or impact of disruptions.
The world has clearly become more unpredictable in the past few
years, and this has created unprecedented challenges for supply
chains. Fortunately, advances in SCRM technology are providing us
with better tools so that we can manage all of our current and future
risks more effectively.
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Glossary
Active monitoring: A process that constantly assesses the status of a
supply chain, watching for risk and disruption.
Glossary 41
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Qualitative metrics: Measurements of the opinions or perceptions of
supply chain stakeholders.
Risk profile: A prioritized list of the risks that could disrupt part of a
supply chain.
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