Supply chain risk is something that businesses care about. It's particularly relevant to businesses in highly regulated markets and large multinational companies. Being able to identify, assess, and manage these risks is fundamental to keeping the business running smoothly, securing compliance, and preventing money laundering. Various regulations, such as SOX, GDPR, and the FCPA, have compliance requirements in areas such as financial reporting, data security, and anti-bribery. The risks themselves can be many kinds: operational, financial, geopolitical, cyber, environmental, and supplier-related.
Supply Chain Operational Risks
Operational risk is risk arising from people, processes and systems within the business. This can include equipment failure, not having enough people, or disruptions to the supply chain and manufacturing. The pandemic is a good example of this in action, with many factories finding themselves in a state of flux due to staff shortages and the slow delivery of parts and materials. If operations fail and you don't meet your contracts, you can be sued and potentially face penalties. You can mitigate this risk by having prevention programmes in place, such as regular maintenance, cross-training of staff, and in-line inspection.
Financial Risks and Regulatory Effects
Financial risk can be a real disruptor to an organisation. It can come from exchange rate movements, credit risk and cost increases. For any organisation involved in international trade, the risk of exchange rate volatility is very real and may cause increased costs, impact on pricing, profit, and contract compliance. There is also the risk that a partner or supplier may not have passed financial due diligence, which could in turn expose the organisation to AML issues. One global electronics distributor found itself in this position when it discovered during a routine compliance check that one of its upstream suppliers was the subject of an AML investigation. It immediately suspended all transactions with that supplier and ran its own internal review. As a result, it updated its third-party vetting process and provided additional AML training to its procurement team. It responded quickly and, as a result, avoided any penalties and got its compliance back on track. The way to manage financial risk is through hedging to reduce currency risk, conducting due diligence on partners and suppliers, and, of course, maintaining clear payment terms and credit limits. It's important to monitor financial risk regularly.
Geopolitical Risks to Supply Chains
Geopolitical risk results from political instability, war, or changes in trade policy and can significantly impact international business. This can appear as trade barriers, sanctions, or local conflict, which can in turn have a knock-on effect on the movement of goods and logistics. Breaching trade embargoes or export controls can result in very large fines and reputational harm. The key regulatory and sanctioning regimes that compliance managers need to be aware of are U.S. Treasury OFAC sanctions, EU sanctions, and UN Security Council embargoes. The way to manage this risk is to stay aware of what is going on in the world, maintain a diversified sourcing strategy so you aren't reliant on a single high-risk country, and ensure all operations comply with relevant international trade laws and sanctions regimes.
Information Risks and Cybersecurity
As we go further down the digitalisation route, our supply chains face an ever-increasing number of cyber risks, including ransomware, data theft, and IT system failure. Such attacks can have a devastating effect on business and can breach data protection legislation such as the GDPR. The 2017 NotPetya ransomware attack is a case in point for how interconnected supply chains are now. It caused a global shipping disruption. It's therefore essential that organisations adopt good cyber hygiene, perform regular vulnerability scans, train their staff on anti-phishing and cyber safety and have strong data backup and disaster recovery in place.
Environmental and Natural Disaster Risks
Environmental risks are natural disasters and climate-related disruptions. A flood, a hurricane, an earthquake, a pandemic, etc., can all damage infrastructure, disrupt deliveries, and reduce the available workforce. The 2011 earthquake and tsunami in Japan is a case in point for its effect on global car and electronics supply chains. To manage these risks, you would want to adhere to sustainability standards and have a disaster recovery plan in place. Key actions include having a business continuity plan, using suppliers in different locations, and maintaining a diversified, resilient supply chain.
Supplier and Procurement Risks
Supplier and procurement risk involves ensuring that your suppliers and vendors are reliable, compliant, and deliver quality goods and services. The risks here are late delivery, suppliers going bust, and corruption in the procurement process. If you're reliant on a single supplier, you're in a very vulnerable position. You can have problems if a supplier breaches the law or is found to be corrupt or involved in bribery. To reduce these risks, you need to be very careful in your selection of suppliers, use a range of sources, and have contracts in place that clearly define the services to be provided and the penalties for default. You need to be monitoring supplier performance in real time to meet both your regulatory and business requirements.
Best Practices to Develop a Resilient Supply Chain
Organisations should be taking active steps to manage risk throughout the supply chain. They need to identify the main points in the chain, assess the likelihood and impact of various risks, and put appropriate controls in place for each risk category.
Resilience is developed through continuous monitoring, scenario planning, and tools such as predictive analytics, AI-based risk analysis, and supply chain visibility platforms. The range of technologies available for supply chain risk management is extensive, with SAP Ariba, Riskmethods, and Coupa being common examples of platforms that can automate risk identification and improve transparency across the supply chain. Ongoing communication with suppliers, reviewing contingency plans, and complying with regulations are all key to keeping the business running and staying in line with relevant rules and regulations.
Conclusion
Supply chain threats are all over the place, really, from operations and finance through to geopolitics, cyber risk, the environment and suppliers. You can mitigate risk, maintain business performance, and improve compliance by emphasising compliance risk management and good supply chain planning. Building supply chain resilience is a key requirement that enables organisations to remain robust and compliant in an interconnected, regulated world.
Following Steps for Compliance Managers
- Map out your supply chain to identify your critical suppliers and your risk points.
- Review and update the compliance policies to ensure they're in line with the current regulatory environment.
- Carry out due diligence on all suppliers and all third-party partners.
- Put in place systems for continuous risk monitoring and for rapid response to any developing threats.
- Carry out regular staff training regarding compliance and risk management best practice.
- Have clear contingency plans and business continuity procedures in place.
- Keep in regular contact with our key suppliers to ensure the requirements are being understood and to keep them up to date with our progress.
By doing that, compliance managers can begin to build a more robust, more resilient supply chain.