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Founder and CEO of Rubix, Mohan Ramaswamy has an overall experience of 22+ years, working with leading MNCs. Prior to setting up Rubix, Mohan headed the LexisNexis business for India and South Asia, transforming the company into one of the most respected brands in the Indian Legal Information world. LESS ... MORE
The primary reason for businesses to exist is to make profits. In a perfect world, having a good product that caters to a specific need for a growing base of customers would ensure profits. Unfortunately, we do not operate in such a perfect world. Many variables drive business success. The last two years have shown, yet again, that these variables are influenced by all kinds of events—pandemics, geopolitical instability and wars, blockages on cargo routes (e.g., the Ever Given’s accident in the Suez Canal), natural disasters, political unrest, regulatory announcements, leadership changes, production shortages, shipping container shortages, supply gluts, etc.
Sometimes, these variables flip from positive to negative overnight, but mostly, the change is gradual. Sudden flips cause some risks to skyrocket instantly while creating a ripple effect on others. It is especially true for manufacturers of goods since these are increasingly a part of complex global supply chains. Therefore, managing, controlling, and mitigating the financial risks of various participants in the supply chain is an absolutely critical activity.
Types of Financial Risk in a Supply Chain
Any risk that threatens the financial health of any business, which is a part of a manufacturing supply chain, constitutes a financial risk to the entire supply chain. There are different types of financial risks, and the exposure to these risks needs to be measured, assessed and controlled at all points in time.
Some of these risks include:
1. Non-payment of dues by the customer/ distributor/ dealer, i.e., bad debts 2. Non-delivery of the promised goods or delivery of inferior-quality goods by the supplier 3. Delayed deliveries of raw materials, components, etc. that cause cascading delays in the manufacture and supply of the finished product; these delays adversely impact the working capital cycle and result in higher interest and financing costs 4. Volatility in commodity prices; if commodity prices are not properly hedged, they can cause huge financial risks to businesses 5. Unhedged foreign exchange exposure 6. Labour shortages in the supply chain result in delays and higher costs; for example, in the US, labour markets are extremely tight at present, causing wage inflation and worker shortages, leading to knock-on effects on all parts of the supply chain. 7. Shipping delays caused by shortages in the availability of shipping containers or vessels; this happened during the COVID-19 pandemic, causing freight costs to skyrocket and impacting the viability of various businesses 8. Problems caused by improper legal contracting between buyers and sellers, especially in international transactions; this causes delays in goods getting cleared from ports and results in very high demurrage costs 9. Geopolitical issues such as war and conflict can result in trade sanctions; these have a long-term financial impact on supply chains.
Need for Management of Financial Risks in the Supply Chain
The Federal Reserve Bank of New York has devised a new indicator called the Global Supply Chain Pressure Index (GSCPI) to measure supply chain conditions. This measure, back-dated to 1997, showed relatively small fluctuations till 2020. Since the pandemic, supply chain pressures have gone through the roof, and the index has climbed to unprecedented levels.
Not surprisingly, the clamour for more effective supply chain management has also reached a crescendo because of the lessons learned from the pandemic. Due to supply-chain disruptions, companies are considering the development of alternative sources of supply closer to home, especially for critical items, such as pharmaceuticals, silicon chips, etc. Having said that, geographically diverse and complex supply networks are here to stay for most products, given cost and productivity arbitrage between countries.
CFOs, Chief Risk Officers, and Supply Chain Heads of companies must collaborate to create a risk management plan that safeguards the company against the financial impact of the risks mentioned earlier in this article. Risk Management in the Supply Chain domain has several objectives:
Steps in Managing Risks in the Supply Chain
A comprehensive supply-chain risk management process can be approached through 4 steps.
Stages of Supplier Risk Management
A good risk management plan must include measures to identify, manage, control, and mitigate risks at every stage of a business relationship. Let us look at it from the point of view of three stages in a transaction lifecycle.
Leveraging Technology and Analytics for Supplier Risk Assessment:
Data science and technology-backed platforms have delivered promising results in the area of Supplier Risk Management. Today, at every stage of the supplier risk-assessment lifecycle, there are tools and platforms to aggregate data from internal and external sources, systematically generate automated risk scores using scoring engines, and monitor these risk scores based on new data. It helps speed up the risk management process and also reduces the scope for human error and bias in supplier selection. The algorithms in these risk management platforms are easily customisable to meet the needs of different sectors. The platform can also provide updated risk scores and intelligence as frequently as the risk management team desires. If the platform detects higher levels of risk at a supplier due to some negative information, risk mitigation actions can be quickly implemented by the risk management and supply chain teams.
In conclusion, having a well-designed, technology and analytics-based risk management system is imperative for today’s complex and interconnected supply chains.
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Views expressed above are the author's own.
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