Think about your worst logistical nightmare, the worst case you can imagine for your supply chain. Now make it real. Would you be prepared to fix it? If you’re not sure, the answer is probably no. And this is because you have not done adequate risk management of your logistics.
Despite the fact that logistics risk management is the best lifeline for the most critical moments and can safeguard the future of the company, many companies have not yet developed a plan in this regard. According to a study by the University of Tennessee, 47% of companies have no planned plan for the closure of any company factory or distribution center, while 31% have no written plan to service customers. clients in the event of a disaster.
In order not to belong to these groups, we are going to see how to implement a logistics risk management system in our company.
Steps of a logistics risk management
There are several models for creating a risk management plan for your logistics. However, most of them will have these points in common: identification of potential risks, evaluation of said risks, preparation of plans and measures to combat them, and periodic updating of the plans.
Identification of logistics risks
Logically, the first step should be to know what are the variables that can affect our logistics. To help you do this, it’s best to take a couple of steps back in your head to try to put your supply chain in perspective. Keep in mind that risk management can include cases as varied as legislative changes, loss of suppliers, strikes, insolvency situations in some link in the supply chain, natural disasters…
To find these threats, you can try to consult other risk management plans, go to a consultant, brainstorm with your company’s staff, look for success stories, review the links of your supply chain step by step (analyzing how and how much you depend on each actor) and even open a newspaper and see how much of the news could affect you if it happened in your area or in your sector.
Evaluation and prioritization of logistics risks
Now that you have your list of potential enemies ready, it’s time to order them. Not all risks have to be treated equally and their importance is often evaluated based on characteristics such as: severity of the problem, probability of it happening, speed, frequency, possibility of detection…
The severity of the problem indicates the relevance of the risk. For example, a large earthquake could mean the complete destruction of some facilities while the loss of a supplier could be quickly corrected by having a certain safety stock.
Following the previous example, the probability of an earthquake or a natural catastrophe is not equally high in all areas of the planet. A transport company located in Madrid may never have to deal with a natural catastrophe, but risks such as errors in demand forecasts must be present in practically all companies.
Speed is related to the ability to detect on time. Both of them wonder about the possibilities that our company has to deal with the risk once it has appeared. It covers knowing how much material or stock we have to face the loss of a production line, how long it would take to correct it, the time it would take us to normalize the situation once the problem is detected, if detecting it soon we could solve it without having repercussions for our clients etc
Frequency is also essential. The periodicity of the weather makes risks such as the monsoon and heavy rainy seasons, or the problems derived from peaks of activity such as Christmas dates, relatively predictable. If a risk repeats itself every year, it will be more important than one that might not happen in the next century.
To carry out the final classification, a method that can be used is to put a numerical score from 0 to 10 for each risk in each of the different sections and then multiply them together to obtain the final value. The higher the result, the more you need to worry about that point.
Preparation of plans to mitigate and solve logistics risks
Now that we know what the threats are and what their importance is, it is time to solve them. Crisis situations are very stressful, which makes it even more important to have a manual in advance that specifies the solutions to resort to. But do not limit yourself to specifying what to do when the problem arises, but you must propose solutions to mitigate the severity and also to prevent the risk from becoming a real problem.
Once the risks have been analyzed, we can establish in our plan that we need, for example, a second supplier for a certain material and that, in addition, it is geographically distant from the main supplier to avoid an environmental catastrophe affecting both. But we cannot stay here, we have to specify which collaborator it will be, know and establish the conditions for collaboration, the possible costs that the change would have, the availability of the new supplier to take care of our needs and the new workload that we would entail , etc.
Our analysis will also allow us to decide if we want to work simultaneously with both providers at the same time or if it will be enough for us to have a safety stock that covers the time we invest in going from the first to the second provider.
Other usual measures usually include improving the quality of suppliers, the implementation of quality systems -such as the Six Sigma and Lean principles-, the acquisition of insurance that covers part of the risks, the review of safety stocks, increasing the requirements of the financial solvency of the companies with which we work, promoting the traceability of the entire supply chain for early detection of problems, etc.
This will have a cost, but in turn it can save us a lot of trouble. “The more we want to cover a risk, the higher the costs to assume. Redundancies are never free”, explains Javier de la Viuda, supply chain director at Diageo, in The Red Book of Logistics.
In short, we must create fully operational and specific plans that can be used both before the problem occurs, to prevent it, and from minute one in which the risk has become a reality, to mitigate the consequences.
Update logistics risk management plans
A risk plan must be a living element. The planet, companies, sectors, economic conditions and societies change, and plans have to do so at the same pace. For example, terrorism may have made an appearance in risk plans or in countries that did not consider it up to a few years, or a country that seemed relatively calm has been politically or economically destabilized. Or perhaps the price of fuel has become a problem of the first magnitude when until a little while ago it seemed like one of the benefits of working in a certain location.
We cannot trust or expect that a risk management plan for logistics will continue to be valid over the years if we do not take care of updating it.
Assessing logistics risk management
“Frankly, my boss doesn’t ask me to look at this (risk management). The right thing to do would be to do it, but they don’t reward us for it,” says an interviewee in the University of Tennessee report. This lack of awareness is not exclusive to large companies, as many small and medium-sized firms consider risk management to be an additional expense that they cannot afford. And, although it is true that the analysis of our supply chain will always entail an expense in material and/or time, surely the cost that companies cannot afford is that of a risk that becomes real and threatens all their logistics.