Disruptions are unavoidable. From natural disasters to cyberattacks, supply chain resilience relies on identifying risk tolerance and implementing strategic, adaptable risk management approaches. We explore how to define and navigate your company’s risk exposure effectively.
Disruption is Inevitable: Preparing for the Unpredictable
In an era marked by frequent disruptions—ranging from natural disasters to cyber incidents and material shortages—supply chains are constantly under threat. While weather events like hurricanes and floods are still major concerns, risks today encompass more unpredictable challenges: software outages, regional conflicts, cyber risks, and even unforeseen global events such as pandemics. As the world grows more interconnected, disruption has become an everyday reality rather than an occasional setback, demanding supply chains to be ever-ready.
But are companies genuinely prepared for the breadth of risks they face? In this context, one of the most critical questions for supply chain leaders to ask is: “What is our level of risk tolerance?” Understanding and defining risk tolerance can significantly shape how an organization withstands and recovers from disruptions.
Understanding Risk Tolerance in Supply Chains
Risk tolerance refers to the level of risk a company is willing to accept without compromising its operations, finances, or reputation. While eliminating risk entirely is impossible, effective risk management involves minimizing exposure to acceptable levels. A balanced approach helps companies continue operations despite challenges—whether that means dealing with concentration risk from suppliers or maintaining resiliency in the face of regulatory upheavals.
Supply chain resilience hinges on defining which risks are tolerable and which require mitigation. For instance, some companies may establish a zero-tolerance policy toward issues like child labor, slavery, or cybersecurity compliance failures. Conversely, risks such as potential tariff changes or material shortages might be deemed tolerable if they pose a low threat to long-term operations.
To illustrate, take the case of the hot sauce brand Sriracha, which faced a shortage when its exclusive supplier of chili peppers experienced a drought. This situation revealed a classic concentration risk, where reliance on a single supplier led to production challenges. A diversified approach—sourcing from multiple suppliers—could help reduce such vulnerabilities.
Components of an Effective Risk Strategy
Developing a robust risk management strategy starts with understanding both internal and external risk factors. An effective risk management program is defined by three essential elements: executive commitment, program maturity, and organizational urgency.
Executive Commitment: Achieving buy-in from leadership is essential for integrating risk management into a company’s strategic framework. Leadership’s understanding and advocacy of risk management programs can determine how effectively an organization can respond to disruptions. The most successful risk programs have a clear champion—often a Chief Risk Officer or another senior executive—who takes ownership and leads company-wide efforts to address third-party and supply chain risks.
Program Maturity: Many companies believe they have sophisticated risk management systems, but the reality often reveals otherwise. The maturity of a risk program is not just about having software or monitoring tools—it also involves having an adaptable, defensible system that can withstand regulatory scrutiny. Risk maturity grows with the ability to handle more complex threats, from direct supplier risks to the complexities of fourth- and fifth-party dependencies. Regulations are also evolving, with new standards like the EU’s Digital Operational Resilience Act (DORA) placing stringent requirements on financial institutions to manage risks throughout their digital ecosystems.
Urgency and Focus: Effective risk management also requires a sense of urgency, as risks and disruptions can escalate quickly. Prioritizing risks—such as concentration risks, geopolitical factors, and compliance challenges—is essential for companies to maintain focus. Attempting to tackle all potential disruptions simultaneously can dilute focus, making it essential for businesses to identify the most pressing threats and address those first.
Practical Steps for Building a Resilient Supply Chain
Building an effective risk strategy requires starting with current capabilities and incrementally improving them. Organizations should start small but think big, building a foundational risk management program with the flexibility to evolve. Here are several key practices:
Prioritize Risks: Identify which risks are most critical to your business continuity. For example, technology risks and concentration risks are often top priorities due to their potential for widespread disruption.
Invest in Suitable Technology: Modern risk management tools offer automation, risk evaluation, and consolidated reporting, making it easier to assess supply chain partners and take preemptive actions.
Ensure Stakeholder Alignment: A resilient risk management strategy must involve buy-in from different departments, as risks vary across business functions. While some risks, like cybersecurity, require uniform governance across departments, other risks may require a more tailored approach depending on the specific role of each department.
Continuous Monitoring: Risk management is not a one-time activity but an ongoing process. Consistent evaluation of suppliers, environmental risks, and regulatory landscapes is crucial to staying ahead of potential disruptions. Supply chain partners and third-party providers must also be continuously vetted to identify vulnerabilities that could lead to future issues.
Resilience as a Competitive Advantage
In a world where supply chain disruptions have become the norm, risk management is no longer an optional practice but a fundamental necessity. Companies that establish clear risk tolerance levels, invest in robust risk management systems, and build adaptable strategies will be better positioned to navigate uncertainties effectively. The key is not to aim for the impossible goal of eliminating all risks but to strategically manage them—transforming potential vulnerabilities into resilience.
Today, resilience in the supply chain is not just about surviving disruptions—it’s about using risk management as a competitive advantage, ensuring continuity and strengthening market position even in turbulent times.
