Understanding Supply Chain Risk: The Recent Scourge of Defective Chinese-Made Products Has Highlighted the Perils of a Poorly Monitored Supply Chain. Too Many Companies Have Been Forced to Learn the Hard Way That, Whether You like It or Not, Your Suppliers' Issues Are Also Your Own

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The primary role of supply chain management is to ensure the timely delivery of quality goods and services to the market. Exposures abound, however, which can lead to lost sales and reputational damage. The use of inferior raw materials, manufacturing imperfections or software programming errors can all result in quality defects, which cost time and money to resolve. Meanwhile, health, safety and environmental issues, such as the discovery of heavy metals in products, fire safety concerns related to electrical equipment or environmental issues related to the extraction of raw materials used in the manufacturing process, can also leave companies open to liability.

Combine these risks with logistical errors that result in shortages and surpluses, and the task of managing supply chain risk can seem daunting.

That is where the risk manager comes in. It is the risk manager's responsibility to gain a clear understanding of the supply chain process, its key exposures and values, and to develop a plan to minimize the adverse effects of the identified exposures on the organization.

Identifying the Risks

The first step in this mission is to identify the cost of risk attributable to the supply chain, including the values at risk within the chain at specific locations and times. To do this, the risk manager should carefully analyze the process with the objectives of:

1) Understanding the flow of goods and services

2) Identifying key exposures and values

3) Documenting the process to accurately describe it to management and third parties

4) Reviewing supply chain insurance coverage

5) Developing recommendations to management on existing or proposed risk management techniques

6) Assisting individuals involved in the supply chain with risk identification and risk control practices.

As the risk manager carries out this analysis, factors such as vendor and customer information, contracts and agreements, ownership and sub-contracting issues, shipping routes and values will also need to be researched in order to understand the overall exposure.

In addition, reviewing the insurance portfolio will reveal the available coverage and limits. The risk manager can find areas of cost savings, whether it is through improved policy wording, higher limits, additional coverage or even by raising the quality of the underwriting submission to enhance insurers' understanding of the risks and the structure of the supply chain.

In order for a supply chain analysis to be effective, the risk manager must gain the support of those that directly control all elements of the chain. The risk manager should inform the participants about the objectives of the exercise and stress its overall benefit. A completed analysis will give the organization a better understanding of the inherent risks in the supply chain, develop an appropriate risk management policy and make recommendations to improve the effectiveness of the supply chain.

Starting the Analysis

The first step in the analysis is to develop a supply chain flow chart showing major parties and values. The following items should be studied:

1) Parties in the supply chain including customers, vendors, contractors and other suppliers of goods and services

2) Contracts and agreements relating to the supply chain, including purchase orders and agreements, manufacturing agreements, contracting agreements and lease agreements

3) Ownership of the goods or services at each point in the process

4) Countries of origin and end user

5) Major shipping routes and means of transport

6) Costs of the goods and services leading to the proposed selling price

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The goal of the supply chain flow chart is to understand the structure of the supply chain and the components that make it work. …

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