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Supply Chain Risk Management for Sourcing from China

2024-04-16
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In the contemporary economy, many businesses depend on procuring products and components from China to maintain their competitiveness. China presents several benefits including cost-efficiency, manufacturing proficiency, and an extensive supplier network.

Its significant role in global manufacturing and distribution reshapes the way sourcing is approached. Nonetheless, despite the advantages associated with sourcing from China, it also entails a range of risks. Effective supply chain risk management is crucial for ensuring a smooth and profitable sourcing operation.

What Are Typical Supply Chain Risks?

Risk management involves identifying, assessing, and mitigating risks throughout the end-to-end supply chain. Internal risks originate within the organization, while external risks stem from factors outside it. Understanding this distinction is crucial for effective risk mitigation strategies.

1) External Supply Chain Risks

External global supply chain risks originating outside the organization are challenging to forecast and demand substantial resources to address. Common examples include the following:

Demand Risks: Demand risks result from inaccurate forecasting of product demand, often due to insufficient understanding of purchasing trends or unpredictable market fluctuations.

Supply Risks: Supply risks arise when essential raw materials are not delivered punctually or at all, disrupting the flow of products, materials, or parts.

Environmental Risks: Environmental supply chain risk stems from socio-economic, political, governmental, or environmental factors, impacting timing and various aspects of the supply chain.

Business Risks: Business risks emerge when unforeseen alterations, such as the acquisition or divestment of a supplier company, disrupt the smooth functioning of the supply chain.

Rising Labor Costs: Rising labour costs in China prompt businesses to seek alternative sourcing options to maintain cost-effectiveness in manufacturing.

Currency Exchange Rate Fluctuations: Exchange rate fluctuations affect the cost of goods, especially in multi-currency transactions.

Ethical and Social Responsibility:  Ethical and social responsibility concerns, like labour conditions and environmental impact, can influence brand image and reputation.

Language and Cultural Barriers:  Language and cultural disparities can cause misunderstandings in business communication.

Transportation and Logistics Issues:  Port congestion, transportation delays, and infrastructure constraints can hinder the flow of goods within and out of China.

Regulatory and Compliance Risks: Navigating China's regulatory landscape, prone to frequent changes, necessitates businesses to remain vigilant about regulatory requirements, quality standards, and trade rules.

Political and Legal Risks: Political and legal risks arise from shifts in government policies, legal disputes, and instances of corruption in supply chain operations.

2) Internal Supply Chain Risks

Internal supply chain risks, controllable and monitorable with tools like risk assessment software, analytics, and IoT, include factors like operational inefficiencies and workforce issues, although somewhat unavoidable.

Manufacturing Risks: Manufacturing risks entail potential disruptions to critical components or processes, leading to deviations from scheduled operations within the workflow.

Business Risks: Disruptions to core personnel, management, reporting, and other critical company operations are the source of business hazards.

Planning and Control Risks: Inaccurate predictions, evaluations, and poorly designed production and management procedures lead to planning and control hazards.

Mitigation and Contingency Risks: Mitigation and contingency risks arise when a business lacks a plan to address supply chain disruptions effectively.

Over-Reliance on a Single Source: Over-reliance on a single supplier or sourcing location in China exposes your supply chain to potential disruptions.

Intellectual Property Concerns: Intellectual property theft and counterfeiting are ongoing concerns in China, necessitating robust legal protection measures for safeguarding your assets.

Understanding the entirety of supply chain risk factors is crucial for pre-empting disruptions. Familiarity with potential issues enables effective implementation of risk management strategies, enhancing resilience against disruptions.

How to manage supply chain risks?

To optimize sourcing from China and uphold a resilient supply chain, prioritize your supply chain risk management. It is a vital aspect of a successful sourcing strategy, ensuring sustainability and success in operations.

1) Leverage the PPRR risk management model

The "PPRR" risk management model, widely adopted in global supply chain management, which stands for:

Prevention: Take precautionary measures to reduce supply chain risk.

Preparedness: Develop and implement a certain emergency contingency plan.

Response: On your contingency plan try to reduce the impact of any disruptive event.

Recovery: Resume operations and get things to normal running immediately.

2) Manage environmental risk in your supply chain

An excessive array of software solutions within your ecosystem, especially when business data is fragmented across disparate systems, can hinder operations. To effectively harness the power of data science and predictive analytics, it is essential to invest in a comprehensive retail solution.

This solution should feature a centralized, well-organized data repository, enabling streamlined access to information and enhancing the ability to leverage advanced analytical techniques for informed decision-making and improved operational efficiency.

An excessive array of software solutions within your ecosystem, particularly when business data is fragmented across disparate systems, can hinder operations. To effectively harness the power of data science and predictive analytics, it is essential to invest in a comprehensive retail solution.

This solution should feature a centralized, well-organized data repository, enabling streamlined access to information and enhancing the ability to leverage advanced analytical techniques for informed decision-making and improved operational efficiency.

Consider the following strategies to improve supply chain resiliency:

Multisource: Diversify suppliers based not only on expenditure but also on potential disruption impact. Seek additional suppliers and consider those operating from multiple locations to mitigate risks and ensure resilience in the face of disruptions.

Nearshore: Go for suppliers and distributors nearer to your operational centre or end point of the supply chain to minimize cycle times for product development and delivery. While regional suppliers may incur higher costs, reduced travel time mitigates potential risks.

Stress test often: Mapping your supply chain network is an initial step. Regular, comprehensive stress tests are crucial for uncovering vulnerabilities, including those concealed deep within the supply chain.

Build buffers for inventory and capacity: While it is an added expense, strategic planning can justify it. Utilize new product launches or expansions to create buffer capacity. To mitigate climate-related risks, consider stockpiling products during high-risk periods like hurricane season.

Invest in product and plant harmonization: Employing identical technology for diverse components provides enhanced flexibility during disruptions. Utilizing uniform software across the network, particularly cloud-based architecture minimizes inefficiencies from siloed data and improves system communication.

3) Improve your cyber supply chain risk management

While the Internet of Things and digital technologies enhance supply chain operations, they also expose businesses to cybersecurity threats like malware, ransomware, phishing, and hacking, compounded by environmental risks.

Try using these risk management techniques to fortify your cybersecurity defences:

- Implement compliance standards for all third-party vendors, encompassing manufacturers, suppliers, and distributors.

- Establish user roles and security measures to limit who can access your system and the degree of authorization they have received.

- Before signing any contracts, conduct a thorough evaluation of the vendor risk.

- Put into practice data stewardship guidelines that specify who is responsible for what data and how it should be used.

- Give all staff members thorough instruction on cybersecurity procedures.

- Put in place software that gives you complete supply chain visibility so you can spot anomalous activity right away.

- To guarantee business continuity, collaborate with suppliers in your supply chain network to create a single disaster recovery strategy.

- Set up backup safeguards to protect your data backups.

- Keep your company's firewall, anti-virus, and anti-spyware software up to date. You should also research more sophisticated cybersecurity techniques like DNS filtering and network access control.

4) Seeks to enhance the visibility of the supply chain

Enhance your risk management by gaining comprehensive visibility into all aspects of your supply chain. Utilize predictive financial stability reporting from major credit rating agencies to assess supplier viability.

Invest in technology for improved product and shipment visibility, such as service portals, IoT sensors, and automated inventory reports, to ensure timely updates to customers and proactive mitigation of delays during the final delivery stages.

5) Track the right freight carrier metrics

Manufacturers rely on dependable delivery for reputation, while retailers need timely merchandise for selling windows. Partnering with a freight carrier capable of consistent results is crucial for all supply chain stakeholders. However, not all carriers meet expectations, and even one late delivery can disrupt operations.

When evaluating carriers, a thorough assessment is essential for uninterrupted supply chain flow. You must consider these metrics to offer support for your supply chain risk management:

Transit Time: This refers to the lead time, indicating the duration between shipment departure from your facility and its arrival at the customer's location.

Number of Stops and Average Stop Time: The number of stops a freight carrier makes enroute to delivering a shipment directly impacts the delivery time to customers. Even with few stops, lengthy average stop times can jeopardize on-time delivery, disrupting the supply chain.

Monitoring these metrics is crucial for maintaining supply chain efficiency and reliability.

Average Loading Time: This refers to the loading time for freight onto a carrier, including paperwork completion upon arrival at the loading dock. Like other metrics, it is crucial for assessing supply chain efficiency and operations.

Route Optimization: This pertains to the duration required to load freight onto a carrier, encompassing paperwork completion upon its arrival at the loading dock. Similar to other metrics, this factor is critical for evaluating supply chain efficiency and overall operational performance.

Maintenance Schedule: A freight carrier adhering to a consistent maintenance schedule is less prone to breakdowns, thus reducing the risk of supply chain disruptions.

6) Implement a logistics contingency plan

Retailers and manufacturers must establish logistics contingency plans akin to emergency response plans to maintain business continuity during supply chain disruptions.

Given the COVID-19 crisis's global disruptions, robust contingency plans are critical. The following tips can be helpful while creating a contingency plan for managing your supply chain risks:

- Make a detailed inventory of the entities in your supply chain to determine which are most at risk.

- Completely evaluate suppliers, considering variables including political, geographic, and economic risk.

- To avoid being dependent on a single source, broaden your network of suppliers.

- Evaluate logistical suppliers according to their contingency preparations.

- Create a crisis response team to handle important choices during an emergency.

- Establish effective lines of communication to ensure that staff members are aware of their obligations in case of an interruption in the supply chain.

- Thoroughly record every procedure and establish a single source of information that staff members can use to carry out your backup plan.

- Keep abreast of current affairs and modify your backup plan as necessary.

7) Conduct internal risk awareness training

Supply chain risk mitigation involves more than just management. It calls for an organization-wide culture that is risk-aware. Conducting risk awareness training for the entire workforce fosters buy-in at all levels. Training curriculum must include the following:

- Common risks and difficulties in supply chain management

- Risk management best practices

- Internet and computer best practices to raise awareness of cybersecurity

- Software training for supply chain risk assessment to promote end-user adoption.

8) Consistently monitor risk

Supply chain risk mitigation extends beyond management. It necessitates a risk-aware culture across the organization. Implementing risk awareness training for the entire workforce fosters buy-in at all levels, ensuring everyone understands their role in identifying and addressing potential risks, thereby enhancing overall resilience and effectiveness in mitigating supply chain disruptions.

9) Model important risk event scenarios using data

While technology has not reached the point of predicting risk events beforehand, data science and predictive analytics have come close. Big Data offers vast opportunities, enabling businesses to leverage predictive analytics and data modelling to create advanced risk event scenarios.

By forecasting potential outcomes, organizations can develop comprehensive contingency plans, enhancing preparedness for disasters and improving resilience in the face of unforeseen events.

10) Consolidate your data for easy access

An excessive number of solutions in your software ecosystem, particularly if business data is scattered across disparate systems, can impede operations. To facilitate leveraging data science and predictive analytics, invest in a comprehensive retail solution with a centralized, well-organized data repository.

Conclusion

Effective risk management is vital when sourcing from China, ensuring smooth operations. By identifying and comprehending risks, implementing preventive measures, and deploying solutions, businesses can optimize their sourcing endeavours.

Well-executed supply chain risk management not only averts problems but also fosters opportunities, enhancing competitiveness and reputation. Ultimately, it's an investment yielding substantial long-term benefits for businesses engaged in sourcing from China.

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