How to manage risks?

Based on the results of the first two SCRM phases, management measures for supply chain risks can be developed. Based on the risk strategy, it is decided which supply chain risks trigger an immediate need for action (Denk et al. 2008, p. 127). Risks that are above or close to the defined tolerance range or for which an additional increase is expected in the foreseeable future require appropriate action.

The aim of risk management is to change the company’s risk landscape in such a way that an optimization of the ratio of earnings opportunity to risk of loss (risk/return optimization) is achieved (Rogler 2002, p. 26; Diederichs 2012, p. 126).

Five categories of SCRM control strategies can be delineated in the literature: Avoidance, Mitigation, Limitation, Pass-Through, and Self-Sustainability. The first two (avoidance and mitigation) target cause-related measures and the remaining three (limitation, pass-through, self-sustainability) focus on impact-related measures (Sodhi et al. 2012, p. 52; Gupta et al. 2014, p. 83; Handfield et al. 2008, p. 41; Brünger 2009, p. 163f.; Rogler 2002, p. 25ff.).

The selection of control strategies must be based on the agreed corporate objectives and the risk strategy. In addition, it depends on legal, socially responsible, and environmental requirements, as well as general cost-benefit considerations during implementation (ISO 31000:2009, p. 19).

MBP 5/16 Measures and Best Practices for “SCRM Awareness and Culture“

“The issue should be brought to the attention of decision-makers–not only in the short term, but also in the medium and long term.” (Interview – Director Risk Management, Logistics Service Provider)

A positive approach to SCRM requires management’s openness towards suggestions for managing reported supply chain risks in a manner in which employees can see the value that’s being added. This form of a lived risk management culture is also accompanied by an awareness of supply chain risks among employees.

In the numerous expert interviews and focus groups with company representatives and scientists for the development of the maturation model, the following measures were identified: 

  • Establish a risk-conscious corporate culture which welcomes proactive measures to reduce supply chain risks (e.g. by regularly addressing supply chain risks and their consequences, by procedures or behavioral instructions, or by visual aides like photos, diagrams, or hidden objects.
  • Reinforce a pro-SCRM culture that pursues novel SCRM strategies. To this end, frequently highlight small successes or negative examples.
  • Ensure that sufficient human and financial resources are available to deal with SCRM and that the SCRM strategies are not perceived as additional workloads.
  • An important prerequisite for assuming responsibility for SCRM is above all an appropriate awareness of the risks involved. Ensure a relatively ubiquitous awareness-baseline by having upper management frequently address relevant topics, conducting trainings, distributing manuals and procedural or behavioral instructions, and offering visual aides in the form of photos, diagrams, etc.
  • Promote the regular exchange of SCRM-relevant information between the various departments (e.g. through monthly meetings).
  • Communicate the positive results achieved through the use of SCRM measures or the negative consequences of non-compliance.
  • The achievements of department managers and employees with regard to SCRM should be positively acknowledged, orally and/or in writing, by management.
  • Define and communicate thresholds, which should not be exceeded or undercut, in order to promote a common understanding of risks.
  • Where appropriate, try to integrate (as risk indicators) the risks which have been reported by individual employees over a long-term basis, and give the respective employee feedback to motivate them.
  •  Integrate aspects of SCRM as fixed components in the targets set for managerial teams. 
  • Try to extend the SCRM culture to your suppliers (e.g. regular supplier SCRM auditing).

Extract from Schröder, M. (2019): Structured improvement of supply chain risk management. In: Supply Chain Management – Contributions to Procurement and Logistics, Reihen-Hrsg.: Essig, M.; Stölzle, W., Kersten, W., Springer Gabler: Wiesbaden

MBP 3/16 Measures and best practices for “Integration into Existing Planning and Management Systems”

“[…] but how am I supposed to explain to a colleague in charge of R&D that he has to give me part of his budget so that I can take action to avoid a problem that doesn’t exist yet?“ (Interview – Operations Manager, medical device manufacturer)

SCRM is most efficiently implemented, if management is regularly involved and interested in the SCRM measures and seeks to integrate them into existing planning and management practices (particularly those which add direct corporate value, such as budget planning, quality management, production planning, etc.). Individual components of SCRM can be used as decision support tools.

In the numerous expert interviews and focus groups with company representatives and scientists for the development of the maturation model, the following measures were identified: 

  • Develop an SCRM strategy: What are your core issues? What do you want to achieve? What supply chain risks can arise? Which projects should you tackle first? What financial, time, and human resources should you allocate to them?
  • Regularly align your business strategy with your SCRM strategy as changes in business strategies can also affect supply chains.
  • When formulating and designing an SCRM strategy, take into account the basic attitude of the company management towards supply chain risks (e.g. risk-averse or risk-taking).
  • Integrate aspects of SCRM into existing planning systems, such as budget planning and other management approaches (e.g. quality management and sustainability), and make sure to avoid duplicating tasks.
  • Take SCRM aspects into account in strategic decision-making.
  • Try to expand the collaborative approach of SCRM (e.g. through detailed supplier selection, joint supplier development, etc.).
  • In addition to SCRM risks, potential, associated opportunities should also be considered (opportunity management).

Extract from Schröder, M. (2019): Structured improvement of supply chain risk management. In: Supply Chain Management – Contributions to Procurement and Logistics, Series-Editor: Essig, M.; Stölzle, W., Kersten, W., Springer Gabler: Wiesbaden

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