Risk-Based Approach to Supply Chain Risk Management

From unexpected tariff changes to geopolitical shifts, organizations face growing uncertainty. Those that take a proactive, risk-based approach to supply chain management are better prepared to navigate these challenges without major overhauls or reactive scrambling. By anticipating risks and planning accordingly, companies can maintain stability and reduce the impact of unforeseen events.

One effective methodology for adopting a risk-based approach is the LogicManager Risk Wheel framework. This structured process integrates five key steps: Governance, Assessment, Mitigation, Monitoring, and Event Response. By following these steps, organizations can establish a consistent and repeatable process to manage supply chain risks effectively.

Roles and Responsibilities

To ensure proper oversight and reduce human errors, the principle of Separation of Duties (SoD) should be applied within the supply chain risk management framework. This practice divides responsibilities among three roles, preventing any one person from having excessive control.

Applying the Risk Wheel to Supply Chain Risk Management

Governance

Governance involves managing critical resources, including policies, people, vendors, equipment, and technology. It ensures accountability and alignment with strategic objectives, focusing on the integrity and availability of essential supply chain resources. Effective governance requires clear definitions of who designs, implements, and reviews policies.

• Design: Supply chain managers establish policies for vendor selection, contract management, and compliance.
• Perform: Procurement and logistics teams implement these policies according to defined procedures.
• Review: Risk management and internal audit teams regularly evaluate policy adherence and effectiveness.

Assessment

Assessment identifies potential risks that could disrupt the supply chain, such as supplier insolvency, natural disasters, or geopolitical instability. It also involves determining root causes and prioritizing risks based on their potential impact and likelihood.

• Design: Risk assessment teams identify risks and evaluate their impact.
• Perform: Supply chain analysts conduct assessments using standardized frameworks (e.g., ISO 31000).
• Review: Senior management ensures completeness and accuracy of the findings.

Mitigation

Mitigation strategies reduce the impact of identified risks through controls, procedures, and contingency planning. Proactive mitigation involves addressing vulnerabilities and implementing preventive measures, requiring collaboration between supply chain management, procurement, and risk teams.

• Design: Develop risk mitigation plans, including alternative suppliers and inventory strategies.
• Perform: Implement measures like diversifying the supplier base or building inventory reserves.
• Review: Regularly assess the effectiveness of mitigation strategies using performance metrics.

Monitoring

Monitoring ensures that mitigation strategies are effective and that new risks are identified and managed. It requires ongoing data collection, analysis, and reporting to maintain risk awareness and track the success of implemented controls.

• Design: Set up metrics for tracking supplier performance, quality issues, and compliance.
• Perform: Conduct regular audits and track performance indicators.
• Review: Analyze results to identify trends and improvement areas.

Event Response

Event response outlines how to manage disruptions, such as supplier shutdowns or logistics failures. Effective response strategies minimize downtime and financial loss while documenting incidents for future analysis.

• Design: Create escalation procedures for supply chain disruptions.
• Perform: Activate response plans and notify key stakeholders.
• Review: Conduct post-incident analysis to enhance future responses.

Building a Resilient Supply Chain

To build a resilient supply chain, it is essential to consistently update risk assessments to reflect changes in supplier stability and geopolitical conditions. Maintaining collaboration between procurement, logistics, and risk management teams ensures comprehensive visibility into potential risks and their impacts. Additionally, leveraging risk management tools to automate tracking, reporting, and compliance checks can significantly enhance operational efficiency.

Taking a risk-based approach to supply chain risk management allows organizations to proactively address disruptions rather than react to them. By following the LogicManager Risk Wheel framework, companies can create adaptable and resilient supply chains that support long-term operational continuity and strategic success.