After years of disruptions, it's clear that the health of a company's supply chain impacts overall success. There are four pillars of supply chain operational risk—supply, demand, process and environmental ecosystems. Knowing how to identify and manage these risks is key to building a supply chain that is resilient and able to adapt to today's fast-moving, ever-changing landscape.
Each of these pillars has additional subcategories that contribute to the risk category, including hazards, political climate and trade disruptions. These are the factors that complicate the decision-making process for supply chain managers.
Operational risks also include quality issues, late supply deliveries, weak forecasting and inventory mismanagement, which can all negatively impact operations. Supply chain managers need to be aware of the various risks and provide consistent overview to help avoid disruptions and ensure swift responses when disruptions occur. Strategic planning that builds reliable supplier partnerships should focus on the following four areas of supply chain risk:
Supply Risks
These disruptions occur as product, materials or parts flow from point-to-point in the supply chain. Internal and external risks apply to this part of the operational process. Transportation, lead times, pricing and inventory disruptions are areas of concern.
Demand Risk
This area of risk is related directly to unpredictability around customers. Promotions, pricing, bankruptcy and other related losses are all very difficult to predict.
Process Risks
These consist of known and unknown risks. Known risks involve manufacturing yield, receivables, payables and capacity. Unknown risks involve technology and unforeseen disruptions. These are minimized through proper risk assessment and evaluation.
Environmental/Ecosystems Risks
This risk involves political conflicts, exchange rates, weather and environmental regulations. Many of these risks center around “Acts of God”—hurricanes, earthquakes, tsunamis and other natural disasters, none of which are always predictable.
All four pillars of risk need to be considered when creating contingency and risk management plans. Risk mitigation is critical, along with having a backup plan that allows for quick response.
Managing risk factors with global tracking systems like enterprise resource planning (ERP) platforms are a way to have total oversight over the supply chain process. By staying at the forefront of supply chain logistics, companies will make better decisions and build stronger partnerships and communications, which are all key to success.
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About the Author: Dr. Cheryl McCloud
Dr. Cheryl McCloud has more than 30 years of experience in global supply chain management and the added distinction of receiving a DBA from Walden University with a specialization in Global Supply Chain Management. As a licensed U.S. Customs Broker and Freight Forwarder, Cheryl owned her international freight forwarding, customs brokerage, distribution, and federal contracting business, providing many services to importers, exporters and the U.S. Federal Government, becoming a 500 Inc. company.
Now, Cheryl is focused on helping small businesses understand the supply chain and regulatory compliance requirements to avoid unwanted risks and financial costs, creating strong profitability. Cheryl has additionally supported the development of new supply chain management programs in local colleges as a professor and currently the Chair of the Education Committee for the International Propeller Club headquarters in the U.S. and has a prodigious interest in the promotion of education, labor growth and opportunities for the maritime business.
FAQs
After years of disruptions, it's clear that the health of a company's supply chain impacts overall success. There are four pillars of supply chain operational risk—supply, demand, process and environmental ecosystems.
What are the 4 operational risks? ›
Operational risk is usually caused by four different avenues: people, processes, systems, or external events.
What are the 4 pillars of risk management? ›
The 4 Pillars of risk Management is an approach to the planning and delivery of risk management developed by Professor Hazel Kemshall at De Montfort University. The model is based on the four pillars of Supervision, Monitoring & Control, Interventions and Treatment and Victim Safety Planning.
What are the four 4 main elements of a supply chain? ›
What are the components of your supply chain you should be focusing on right now?
- INTEGRATION. Integration starts at your strategic planning phase and is critical throughout your communications and information sharing and data analysis and storage. ...
- OPERATIONS. ...
- PURCHASING. ...
- DISTRIBUTION.
Operational Risks
They can include production issues, equipment breakdowns, human errors, or inefficiencies in the supply chain process. Operational risks often lead to delays, increased costs, or quality problems.
What are the three pillars of operational risk? ›
In this chapter, we discuss the three pillars of operational risk management: capital allocation, transfer of operational risk through insurance, and proactive mitigation of operational risk through product inspection and quality control.
What are the 4 dimensions of risk? ›
This process enables the move from a two dimensional view of independent risks to an interconnected view of the four dimensions of risk – Likelihood, Impact, Velocity and Connectivity.
What are the four 4 categories of risk management techniques? ›
There are four main risk management strategies, or risk treatment options:
- Risk acceptance.
- Risk transference.
- Risk avoidance.
- Risk reduction.
The four elements of supply chain management are purchasing, operations, distribution, and integration. Purchasing manages supplier relationships and procurement. Operations includes demand planning, forecasting, production, and sometimes inventory management.
What are the four major drivers of the supply chain? ›
Major drivers of any supply chain
- Facilities (for example, Production unit)
- Inventories (for example, Stock of goods)
- Transportation (for example. Modes and Routes)
- Information (for example, Customer demand.
It is a component of enterprise risk management. Operational risk can occur for various reasons, including internal control failures, process errors, human errors, business practice disruptions, system breakdowns, external events like natural disasters or pandemics, and fraudulent activities perpetrated by employees.
How to calculate operational risk? ›
Operational risk capital requirements (ORC) are calculated by multiplying the BIC and the ILM, as shown in the formula below. Risk-weighted assets (RWA) for operational risk are equal to 12.5 times ORC.
What are the operational risks in logistics? ›
One common operational risk in transportation and logistics is supply chain disruption. This can occur due to delays in shipping, breakdowns in communication, or unexpected events like strikes or pandemics. Another significant risk is equipment failure, which can lead to delays, increased costs, and even accidents.
What are the Basel 7 operational risks? ›
Basel II set out seven categories of operational risk:
- Internal Fraud.
- External Fraud.
- Employment Practices and Workplace Safety.
- Clients, Products and Business Practices.
- Damage to Physical Assets.
- Business Disruption and System Failures.
- Execution, Delivery, and Process Management.
Common operational risks include risks such as fraud, human error, business disruption, cybercrime, and regulation change. Operational risks can have a variety of impacts on an organization, such as financial losses, reputational damage, legal liabilities, and loss of customer trust.
What are the six key classifications of operational risk? ›
The 7 types of operational risk
- Internal fraud. ...
- External fraud. ...
- Technological failures. ...
- Process execution and management. ...
- Labor Relations and Workplace Safety. ...
- Damage to tangible assets. ...
- Customers, products and business practices.
The four risk management process steps, namely risk identification, risk assessment, risk response and mitigation, and risk monitoring and control, form the foundation of this framework, presented across the tops of the table (Figure 1); the rows down the left side of the framework indicate the four broad risk ...
International Logistics
Dr. Cheryl McCloud | 3 min. read 
After years of disruptions, it's clear that the health of a company's supply chain impacts overall success. There are four pillars of supply chain operational risk—supply, demand, process and environmental ecosystems. Knowing how to identify and manage these risks is key to building a supply chain that is resilient and able to adapt to today's fast-moving, ever-changing landscape.
