Understand risks associated with sources of supply


Every manager is concerned about managing risks within their businesses. Risk is a hazard, a chance of something going wrong. It is a danger that injury, danger or loss may occur.

Risk is potential that a chosen action or activity including the choice of action will lead to a loss or undesirable outcome. This notion implies that a choice having an influence on the outcome exists.

In order to effectively manage risk, the important fact is that you must anticipate it. It is said a problem known is a problem solved. Knowing and anticipating business problems including purchasing and supply challenges is paramount in effective business management.

Purchasing and supply risk management is meant to enable companies to maintain an acceptable service level while maintaining healthy cash flows.

Risks in supply chain involves events that happen with an impact or are likely to impact on the production and distribution of goods.

Some of the supply chain risks include internal and external factors, natural and mechanical mishaps that affect the flow of goods and services from suppliers to buyers.

Natural disasters such as floods and earthquakes affect the smooth operation of supply chains. If we consider the recent natural disasters in Asia, it is a fact that the motor vehicle industry was starved of supplies especially those manufacturers that relied heavily on Japan for sub-assemblies and spare parts.

The impact of natural disasters on the supplies chain is loss of production time because of non availability of inputs. This inexorably leads to loss of sales and eventually loss of customers. Alternative sources of supply also come at a cost.

There are purchasing and supply risks classified as financial. Commodity prices can fluctuate. In the case of imports, the buyer’s currency may weaken and increases the costs of imports.

The recent announcement by Finance Minister to introduce duty on basic commodities inescapably increased the costs of the imports. Financial risks affect margins and profitability. They have negative impact on cash flows.

There are purchasing and supply risks that affect organisational reputation. There are events that adversely impact the public perception of a brand or company in total.

They are product defects, corporate social responsibility issues, and bad press. Consumers are now quality conscious. Governments and citizens are now concerned about their environment and businesses need to manage their carbon footprint.

The press nowadays is heralding quality and environmental issues. Remedial action to correct such risks is very high; they include legal and public relations costs. Bad publicity affects the goodwill and reduces sales revenues.

There are other unexpected changes to the framework of supply chains. Examples are changes in the political environment that have an impact on economic activities.

Consider the dilemma of African-Arabic countries that are engaged in civil unrest. If we look back a few years ago when the targeted sanctions were imposed on Zimbabwe, a number of importers struggled to source from Europe and USA.

Economic policies on the other hand also affect the supply chain, good policies promote trade and increase markets and the opposite is true.

In order to effectively manage risks, buyers need to critical study their sources of supplies. Transparent sharing of information between the buyers and suppliers is key. Procurement functions must invest a lot in supplier base management.

They need to manage inputs used by their suppliers to ensure quality and environmental issues are adhered to. When managing risks in supply chain, buyers need to do risk mapping, categorise the risks and prefer mitigatory measures to high risk areas.

Some mitigating factors include identifying and developing alternative sources of supply or build stocks just in case. A stitch in time saves nine.

Nyasha Chizu is a Fellow of CIPS and CIPS Zimbabwe branch chairman writing in his personal capacity. Email: chizunyasha@yahoo.com