What Are Supply Chain Metrics?

Supply chain metrics are the numbers and ratios a company tracks to measure how
efficiently it delivers goods to customers. Keys to efficiency in supply chain
execution include how well and cost-effectively companies drive the flow of materials
from procurement to delivery, including activities like production, warehousing and
transportation.
The right metrics shed light on where to invest to achieve maximum returns.
Key Takeaways
 It’s vital to employ metrics and KPIs to assess how your supply chain is
performing.
 Important KPIs for finance include cash-to-cash cycle times and gross margin
return on investments.
 Inventory turnover ratios and inventory velocity are two central gauges of how
well your company manages its intake and outflow of goods.
 A central KPI dashboard accessible to all stakeholders helps leaders stay on the
same page and prioritizes resources.

What are supply chain KPIs?

Supply chain key performance indicators (KPIs) quantify how well a supply chain is
performing. Leaders need to decide which KPIs are most important to track.
Because there are many metrics that can add value, we often advise companies to
divide supply chain KPIs into tiers based on functions. A company may decide on a
bucket of top metrics that are most important to its business and watch some lower-tier
KPIs occasionally.
Here are the 10 key performance indicators you should monitor to optimize your supply
chain management.
1. Inventory Turnover
Inventory turnover measures the number of times inventory is sold in a specified period.
To calculate inventory turnover, use the following formula:
Cost of Goods Sold / Average Inventory
A high turnover indicates that your products sell out quickly, that there is high
demand for your products. If your inventory turnover rate is below industry benchmarks,
you may be overstocking.
To improve your inventory turnover, invest in proper forecasting, and inventory
automation software.
2. Inventory Accuracy
This metric measures the accuracy of your inventory by comparing physical inventory
with what’s recorded in your database. Maintaining inventory accuracy can help
reduce inventory carrying cost and stock outages.
To calculate inventory accuracy, follow this formula:
Database Inventory Count / Physical Inventory Count
Your goal is to get an inventory accuracy rate between 95% and 99%. Ways to increase
inventory accuracy include establishing good inventory naming and labeling practice.
You can also leverage warehouse management and inventory management systems to
eliminate manual data entry and reduce human error.
3. Order Fill Rate
Order fill rate is the number of customers orders a company can ship immediately from
available stock. Order fill rate helps you gauge how well you’re meeting customer
demand and the efficiency of your delivery service. The formula for calculating the fill
rate of a supply chain is:
Total Number of Customer Orders Shipped / Number of Customer Orders Filled x 100
According to a report by the Tompkins Supply Chain Consortium, leaders in fill rate are
exceeding 98%, and the average hovers just under 95%.
A low order fill rate can be improved with proper demand forecasting, setting inventory
replenishment parameters to prevent out of stock issues, and providing alternatives for
out of stock items in inventory.
4. Perfect Order Rate
Perfect order rate measures how much orders you ship without errors or deviations.
This metric helps you track your storage and delivery operations, manage costs, and
gauge customer satisfaction.
Four factors contribute to achieving a perfect order: the delivery must arrive complete,
on-time, undamaged, and with proper documentation.
Perfect order performance is calculated as follows:
(Percent of orders delivered on time) x (Percent of orders complete) x (Percent of
orders damage free) x (Percent of orders with accurate documentation) x 100.
Data from the American Productivity and Quality Center shows that, at the median,
organizations have a perfect order index of 90%. Steps you can take to improve your
perfect order performance include improving your ability to take orders correctly,
allocating inventory quickly, delivering products on time and sending accurate invoices.
5. On-Time Shipping
On-Time Shipping measures the ratio of orders that have been shipped on or before the
requested ship date. This metric lets you track your delivery performance and is key to
ensuring customer satisfaction.
It can be measured by:
(Number of On-Time Items / Total Items) x 100
A high on-time shipping rate indicates an efficient supply chain operation. While a poor
on-time shipping rate means orders take too long to reach customers. It’s essential that
you resolve poor on-time shipping issues fast to avoid losing customers.
6. Backorder
Backorders are orders that cannot be filled at the time a customer places them. To
calculate the backorder rate, use this formula:
Number of undeliverable orders/by the total number of orders x 100.
Consistent large backorders with long wait times can be an indication that something is
wrong. You can reduce backorders by using an inventory system to get real-time data
on your stock levels and to reorder products before they go out of stock automatically.
7. Order Cycle Time
Order cycle time, sometimes referred to as inventory cycle time, measures the average
cycle time it takes for a customer to receive a product after placing an order. The
formula of this metric is the following:
Actual Ship Date – Customer Order Date
Short order cycle times indicate you’re responsive to customer orders. On the other
hand, long order cycle times mean your operations aren’t in sync with one another.
Review all of the processes that go into picking and shipping orders and see where you
can automate some processes to save time.
8. Inventory Days on Hand
Inventory days on hand measures the average number of days it takes for a firm to sell
off inventory. This metric lets you know when it’s time to restock your inventory levels.
You can calculate inventory days on hand with this formula:
(Average Inventory for the Year / Cost of Goods Sold) x 365
If your inventory days on hand rate is high, this could indicate that you’re not properly
managing your inventory or having inventory that is difficult to sell.
9. Rate of Return
Rate of return metric measures the rate at which shipped items are returned to you.
This metric can be calculated with the formula:
Total Items Returned / Total Items Shipped
The key to getting insights from your return rate is to find out why your customers return
their orders. This will help you spot weakness in your supply chain, and make
necessary improvements.
10. Order Picking Accuracy
Order picking accuracy lets you know the percentage of your orders that are picked for
shipping accurately. Incorrect picks result in inaccurate inventory, delayed shipments,
and unhappy customers. You can calculate order picking accuracy using this formula:
Total Number of Orders / Perfect Order Rate
According to the 2019 DC Measures annual benchmarking study conducted by the
Warehousing Education and Research Council, best-in-class operations achieve more
than 99.89% order picking accuracy.
To increase your picking accuracy, pick items based on item code, and use automation
as much as possible. You can also group similar items to make inventory easier to
locate and reduce picking time.
Bottom Line
Monitoring the efficiency of your supply chain is crucial to ensuring customer
satisfaction and having a competitive advantage. Tracking many metrics can become
unmanageable quickly, so track a few metrics that are relevant to your bottom line. If
you don’t have the time or resources to track and analyze your supply chain metrics
(KPIs), partner with a third-party logistics provider (3PL). They have the tools and
expertise you need to monitor your supply chain performance metrics and improve your
operations.
SUPPLY CHAIN COSTING AND PROFITABILITY ANALYSIS
What are the Supply Chain Costs?
Supply chain costs are defined as costs that constitute a considerable percentage of the
total sales price of a product or service. Manufacturers usually define supply chain costs
using the total cost of ownership.
The total cost of ownership is defined as the combination of a goods or service’s
purchase or acquisition price. To this, they add the additional costs incurred before or
after the product or service delivery.
Applying the total cost of ownership analysis to the supply chain implies identifying all
direct, indirect, and other associated costs of a product or service.
Direct costs typically include expenses related to the production process such as raw
materials, labor, and manufacturing overhead. Indirect costs may involve transportation,
warehousing, and administrative fees.
Other associated prices can include elements like quality assurance, compliance with
regulations, and potential costs related to environmental sustainability.
How to Calculate Supply Chain Costs?
The first step in calculating total supply chain costs is to create the proper context and
an accurate format to consolidate all cost factors. Identifying relevant internal “issues”
and translating them into their dollar values is critical.
These internal issues, which could affect overall costs, include physical occurrences
such as scrap rates, in-transit damage or quality problems, operational issues, manual
handling errors such as incorrect invoices and recurrent expediting of shipments.
One proven method for evaluating internal and external issues is “unit total cost”
(UTC). The unit total cost is defined as the unit purchase price amended by an
appropriate monetary factor assigned to each issue.
UTC helps give a clearer picture of what a specific source of supply costs and is most
useful when selecting or negotiating with suppliers.
It also provides a context for all stakeholders to see the total picture of their
organization’s expenses. The next step is to map out the manufacturing process,
identify possible issues and quantify the associated costs. These costs are divided into
“hard costs” and “soft costs.”
Hard costs involve an invoice or a direct cash outlay, which could include freight
payments or inventory. Soft prices utilize resources but have no immediate cash outlay;
however, they measure productivity.
What Are the Supply Chain Cost Drivers?
Today’s Internet-of-Things (IoT)- led supply chains are complex and intricately
interconnected. Therefore, a cost reduction in one area of operations can directly result
in a cost hike or variation in another.
It becomes crucial for manufacturers to understand the interrelationship between
various processes in their supply chain and the impact of cutting costs in one single
area on the rest of the value chain.
Here are some of the drivers that can impact supply chain costs in multiple ways:
Investment Costs
Today’s global supply chains are an interconnected network of multi-site suppliers,
manufacturers, distributors, and retailers that stretch across industries and geographies.
Investment decisions are critical in this scenario to help create long-term innovative
strategies of when, why and how to invest in new facilities such as warehouses,
factories and the resources and equipment needed.
A well-instrumented investment decision backed by effective management of
investment costs can go a long way.
Here is the manufacturers’ checklist for managing investment costs:
 Have a holistic view of the entire supply chain network.
 Develop an intelligent market strategy and competitive knowledge.
 Have real-time insights available that drive accurate data-driven decisions for
long-term results.
 To make sound investments, perform an accurate predictive analysis on possible
“what-if” scenarios.
Transportation Costs
Usually, higher transportation costs of finished goods and services result from
poor supply chain planning processes, routing inefficiencies and ineffective deployment
of resources. Therefore, supply chain leaders need to make the right decisions that can
have a significant impact on transportation costs and factors that influence it, like
delivery lead time, fuel price fluctuation, fleet and cargo regulations, etc.
Here is the manufacturers’ checklist for managing transportation costs:
 Use the appropriate design of the supply chain network for an optimal view of the
location of suppliers, manufacturers, distributors, and customers.
 Adjust the utilization of existing capacity by adjusting load size or engaging third-
party logistics (3PL) firms when needed.
  When planning various freight routes, consider the existing capacity and
constraints.
 Make the proper selection of suppliers, distributors, co-manufacturers, and
transport partners.
Procurement Costs
Selecting the best supplier for your supply chain deliverables can be a strategic decision
affecting the overall supply chain costs. Those suppliers who can deliver the best
material at the lowest price and in the shortest time are the obvious choices.
Here is the manufacturers’ checklist for managing procurement costs:
 Leverage your network of reliable suppliers and choose from known partners, as
they know your supply chain nuances.
 Use historical data and real-time insights to make decisions while comparing the
performance and pricing of various suppliers.
Production Costs
Production costs directly impact supply chain costs, and manufacturers must ensure
they have a strategic, logical, tactical, and operational production plan.
Simple manufacturing overhead costs including electricity, water, and equipment
maintenance and repair can spike production costs to a large extent.
Here is the manufacturers’ checklist for managing production costs:
 Develop an ability to assess unit production costs based on which equipment or
operational processes are inefficient.
 After the assessment, plan the potential manufacturing investment in new
technologies after weighing the alternatives.
 Track the effectiveness of the labor workforce, including overtime, layover and
TAT for finished goods.
 Manage stretched machine set-up times and their impact on increased
equipment downtime, production lead times, and reduced capacity.
 Rework the redundant processes that lead to repurchasing expensive raw
materials and restarting the whole manufacturing process from scratch.
Inventory Costs
Inventory is a significant factor for small and large manufacturers that helps them
address demand and supply market volatilities and uncertainties. Ironically, while
inventory is a cushion to protect manufacturers against sharp market fluctuations, it can
also result in high costs.
Here is the manufacturers’ checklist for managing inventory costs:
 Manage accurate inventory levels to positively impact warehousing and
transportation costs, resulting in effective capital management that propels the
company’s growth.
 Reducing inventory costs does not equate to eliminating inventory. Reduce
excess inventory and maintain the right amount of stock of the right products.
Quality Costs
A fundamental premise of manufacturing is that high-quality goods cannot be built cost-
effectively from low-quality components. Quality must be a consistent aspect of doing
business and should be dealt with in the same manner across the entire value chain;
especially for supply chains using just-in-time manufacturing with low inventory levels
because they cannot afford quality failures.
Here is the manufacturers’ checklist for managing quality costs:
 Adopt quality as a primary competitive strategy since the manufacturers that
adapt better are better equipped to handle market fluctuations, ensuring lower
product costs.
 Create a sound quality plan to significantly reduce rework, scrap, repeat
inspection, and improve on-time deliveries.
 Develop good problem identification and problem-solving capabilities;
manufacturers can primarily benefit from superior quality, substantial savings,
and fewer schedule variances.
How to Approach Cost Savings in Supply Chains?
Cost reduction, improvement of supply chain efficiencies, and enhancement of
revenue margins are constant goals of most supply chain leaders.
When it comes to optimizing the supply chain for cost savings, it affects operational
improvements and cost savings at three levels:
High Level (Where to Focus)
At this level, executives can determine where to focus decisions that have a holistic
impact on business health, such as identifying and prioritizing improvement measures to
maximize revenue.
Pro-tip: Get a holistic view of the financial state and health of the business and
improvement areas for continuous profitability.
Mid-Level (Key Drivers)
Here, executives can focus on expanding the critical drivers of proposed changes in the
selected impact area, improving working capital consumption, inventory spending,
operational expenses, throughput trends, or cash conversion cycles.
Pro-tip: Focus on excess working capital, top inventory spends, operations expense,
throughput trends and cash conversion cycle.
Granular Level (Tactical Plan)
Here, the focus is on creating a tactical plan of action to affect the necessary change –
for example, how much buffer stock to maintain, balancing demand and supply
variability, or determining ideal stock levels for effective demand fulfillment.
Pro-tip: Focus on buffer management, supply/demand variability and recommended
stock levels.
This three-level approach to cost savings in supply chain translates into three types of
insights that guide executives in achieving tangible cost savings:
1. What to Move: To streamline material flow, and where improvements will yield
the maximum impact.
2. What to Expedite: To yield that extra sale and strengthen the most important
part of the product portfolio.
3. What to Reduce/Remove: To tackle waste and make room for leaner supply
chain efficiencies.
How to Reduce Supply Chain Costs?
Effectively reducing and managing supply chain costs can have sustained market
advantage.
By leveraging optimized production, product mix, material movement, inventory
management, and asset utilization, businesses can effectively save costs across their
supply chain networks.
The ultimate goal is to reduce enterprise costs by accurately identifying and controlling
supply chain cost levers, thus, sustainably improving margins.
The levers will vary across businesses and business models, but demand-driven
approach, for instance, provides a structured, failsafe strategy for rapid, sustained cost
reduction in the near as well as long term.
1. Net Profit Impact Analysis
Use a Net Profit Impact Summary chart to:
  Quickly compare the contributions of each functional area – demand, inventory,
production/ process, product mix, and logistics – on net profit, considering all
interdependencies.
 Summarize the minimum and maximum range of impact across all business
areas.
 Predict the overall expected net profit impact at a company-wide or business unit
level.
With this level of supply chain-finance visibility, supply chain managers can identify
specific improvement areas that can drive greater revenue and profitability.
For example, you can analyze whether the product portfolio is prioritized effectively so
that only those products are produced and released that can be sold in the market to
generate a positive cash flow.
2. Demand Sensing
Improving the accuracy of demand forecasts and planning can significantly reduce
wastage and eliminate inefficiencies that weigh heavily on a company’s finances.
Demand Sensing capabilities rapidly eliminate operational inefficiencies, optimizing
operational capacity and unlocking additional sales. Businesses can also maximize
available resources and accelerate revenue by determining the potential for
improvement – based on changing market dynamics and recommended actions.
3. Inventory Management
Excess inventory can tie up working capital whereas stockouts are lost sales
opportunities – both detrimental to a business’s profitability.
Businesses can determine which products to stock up more on and which to cut back
on.
This will help you:
 Maintain the optimal inventory levels that support operations, working capital
spend requirements, and sales effort by ranking top-selling products that
experience frequent stock-outs.
 Identify working capital savings and minimize missed sales opportunities due to
stockouts by comparing current stock levels against historical stock levels to
uncover excess inventory.
4. SKU Optimization
Even today, it is a struggle to accurately estimate future sales and thus, overall margins.
This is because demand patterns are so chaotic that business priorities need to keep
changing to enable consistently effective order fulfillment.
But therein also lies a unique cost-saving opportunity!
For instance, businesses should identify:
 The top-selling products that generate the maximum revenue.
 The top-value products that generate the highest margins.
This helps you determine which products to focus on producing more of and which ones
to produce less of so that businesses can strengthen their portfolios and maximize their
ROI.
5. Process and Production Optimization
Meeting operational milestones and long-term business goals by fostering continuous
improvement in the form of measurable, incremental results is key to keeping costs
under control.
AI-powered capabilities essentially combine the abilities of a control tower with
continuous planning across demand, supply, inventory, and operational processes to
keep businesses continuously on track to realize their business goals.
The platform enables you to:
 Quickly and proactively identify and eliminate process bottlenecks
 Identify better, more relevant production KPIs
 Imbibe operational agility via scenario-based responsive modeling
 Perform detailed root cause analysis of “unpredictable” operational disruptions to
ensure further process optimization and resilience.
6. Network Optimization
Unnecessary logistical movements due to incorrect resource allocation and
overproduction slowly chip away at a business’s profitability.
One should dynamically reassess demand priorities against a backdrop of the true
execution capabilities of a business. Its Logistics and Material Flow view, for example,
allows you to:
 Overlay material flows on geo maps so that they can identify and examine choke
points across their entire supply chain network
 Rapidly identify distribution routes that are congested, do not meet OTIF metrics,
or are simply unprofitable at a supplier as well as product level
What are Supply Chain Cost Reduction Strategies?
There are numerous supply chain cost reduction strategies that can be considered
based on the maturity of the supply chain and the business goals. Here are a few key
strategies:
1. Maximize Asset Utilization
Optimally utilize existing capacity and make appropriate investment choices to minimize
waste, maximize resources, improve operational efficiency, and balance demand,
supply, and costs. This approach makes your business more competitive and profitable.
One can maximize asset utilization in the following ways:
 Bottleneck Identification: The AI-powered tool inspects your production
processes at the micro-level to identify and rectify workflow hindrances. It
provides actionable recommendations for workflow restructuring, process
optimization, or resource reallocation, thereby eliminating constraints and
enhancing overall capacity.
 Demand-Capacity Alignment: It analyzes historical data and market trends to
accurately forecast demand. This forecasting helps determine if current
capabilities can meet demand levels and identifies areas where additional
investment is needed, thus avoiding unnecessary expenditures.
 Prioritizing Capacity Utilization: It focuses on top-performing products and key
customers, ensuring efficient resource use for revenue-generating opportunities.
This strategy improves productivity, maximizes profitability, minimizes idle
capacity, and enhances customer satisfaction.
2. Align Sales and Operations Planning (S&OP)
Focus on accurate processes and then define your systems.
S&OP helps share information and unite people in a structured, unified plan that
spreads across the functional departments.
Look out for signs that indicate you might have an issue with your S&OP:
 There are too many stockout incidents.
 High levels of “SLOB” (SLow moving OBsolete) stock
 Increased variations in your demand plan
 Frequent alterations to the master production schedule
 Inaccurate or absence of proper forecasting
3. Demand-driven Supply Chain Strategy
Business objectives should drive the strategy, and strategy should then lead business
tactics, not vice versa. Devise a supply chain strategy that drives the overall business or
customer service objective while understanding the customer’s needs.
Promote a demand-driven supply chain strategy where customer needs are prioritized.
Its forecasting capabilities provide decision-makers with accurate, real-time insights into
demand fluctuations, allowing for agile capacity utilization and proactive risk
management.
When supply chain operations align with real-time demand patterns, businesses can
reduce lead times, adjust pricing strategies for revenue growth, expand margins,
introduce new product lines, and manage limited supply scenarios.
Questions to validate your strategy:
 Have you adequately documented the supply chain strategy?
 Does the supply chain function include all business operations, or is it restricted
to one or two departments?
 Are supply chain projects managed in coordination with the rest of the business
or in silos?
4. Prioritize Inventory Management
Enhance supply chain visibility for seamless inventory movement. As businesses grow,
comprehensive visibility reduces supply chain costs.
Predictive analytics optimize stock levels and inventory management, ensuring the
correct stock levels are maintained, thereby reducing costs associated with
overstocking and understocking.
The tool’s new inventory management capabilities aid in working capital optimization,
cost-effective omnichannel order fulfillment, timely replenishments, and dynamic
management of safety stock. It also enables businesses to proactively analyze project-
wise expenditures to identify whether spending aligns with predictions and
recommendations, allowing for better financial management.
5. Build a Clearer Transportation Strategy
A well-defined transportation strategy can reveal several hidden cost-saving
opportunities in supply chain logistics.
For instance, in the Ready-Mix Concrete (RMC) industry, logistics pose significant
challenges due to the product’s narrow delivery and usage window. AI-powered logistics
planning enhances operational efficiency, optimizes transportation, and supports
sustainability goals. It improves material flow visibility, enhances on-time in-full delivery,
and optimizes route planning, substantially reducing logistics costs.
Cost reductions in transportation can be achieved by:
Developing a strategy that incorporates critical supply chain factors, from crowdsourced
peer-to-peer transportation services to in-house product movement via drones or on-
demand shipping containers. Implementing a robust strategy to mitigate fleet
management risks and predict equipment breakdowns, saving substantial costs in
repairs and reactive accident management.

MEASURING SUPPLY CHAIN RESILIENCE AND RISK MANAGEMENT

Introduction to Supply Chain Resilience
Supply chain resilience is when a company can quickly adapt and bounce back from
unexpected events. These events can be natural disasters, economic downturns, or
political conflicts. A resilient supply chain is agile, reacting fast to keep operations
running smoothly.
The best resilience comes from knowing what risks are coming and fixing them before
they happen.
The Importance of Resilient Supply Chains
In today’s fast-changing world, having a resilient supply chain is key. It helps a company
stay strong even when things go wrong. This way, they can keep doing business and
avoid big losses.
Building a resilient supply chain lets companies quickly adapt to new situations. They
can meet customer needs fast and keep goods flowing.

What Is Supply Chain Risk Management?

Supply chain disruptions impact more than profits; they can damage brand reputation,
lower customer satisfaction, create compliance issues, and hinder corporate
responsibility efforts. Yet today’s global supply chains remain vulnerable, and common
strategies like just-in-time inventory can worsen shocks.
Many organizations lack the ability to assess risk and work with suppliers to mitigate it
effectively. Protecting supply chains without risky trade-offs requires a fundamental
rethink.
Supply Chain Risk Management (SCRM) is the first critical step, focusing on identifying,
assessing, and reducing risks across the supply chain. This includes monitoring
suppliers, logistics, and distribution channels to prevent disruptions, compliance
breaches, and reputational risks.
SCRM’s goal is to ensure timely, cost-effective delivery without compromising quality or
customer satisfaction. In complex, global supply chains, SCRM is essential for
managing risks from natural disasters, political instability, or cyberattacks. Effective
SCRM prepares companies for these risks, with contingency plans like backup suppliers
for example.
Why Is a Supply Chain Risk Management Plan Important?
Supply chain risk management is essential to maintaining business continuity and
safeguarding an organization’s operations, profitability, and reputation. A single
breakdown in the supply chain can hinder a company’s ability to deliver products and
services, potentially eroding customer trust and loyalty. For this reason, businesses
must take a proactive approach to identify, assess, and mitigate risks before they
become problems.
Building operational resilience in supply chains through proactive planning and risk
management is crucial. Companies that invest in robust risk management processes
are better equipped to withstand unforeseen challenges and recover more quickly when
disruptions occur. According to KPMG, “Risk management is no longer a back-office
function – it’s now central to business strategy, with more than 70% of companies
prioritizing risk resilience as a top investment.”
Types of Supply Chain Risks
Let’s take a closer look at some of the most pressing supply chain risks:
Internal Risks
Internal risks stem from within the organization or its immediate operations. These can
often be managed with a high degree of control but, if left unchecked, can cause severe
disruptions.
 Business Risks/Operational Risks: Inefficiencies or poor management
practices can lead to bottlenecks, quality control issues, and missed deadlines.
 Financial Risks: Cost volatility, fluctuating demand, and cash flow issues create
financial uncertainty, which can lead to compromised supplier relationships or
cutbacks in inventory.
 Manufacturing Risks: Delays in production, equipment malfunctions, and labor
shortages can have a domino effect on product availability.
 Contract and Compliance Risks: Managing service-level agreements (SLAs)
and upholding contract terms is vital to minimizing legal exposure. Non-
compliance with terms such as right-to-audit clauses or regulatory requirements
can lead to penalties, strained relationships, and costly legal challenges.
External Risks
External risks arise from factors outside the organization’s direct control, such as third-
party suppliers, geopolitical factors, or environmental changes. These risks require
vigilant monitoring and adaptive strategies to mitigate anything potentially disrupting
operations.
  Reputational Risks: A supplier’s misconduct or failure to meet standards can
significantly damage a brand’s reputation.
 Cybersecurity Risks: With an increase in ransomware and IT disruptions,
cybersecurity risks are an escalating concern. The Colonial Pipeline incident,
which led to significant fuel shortages in 2021, serves as a stark reminder of how
vulnerable supply chains are to cyber threats.
 Geopolitical Risks: Tariffs, government instability, and trade wars can disrupt
sourcing and increase costs. For example, the U.S.-China trade war resulted in
added tariffs on $380 billion worth of Chinese goods, creating supply chain
challenges and financial strain for companies reliant on those imports.
 Environmental Risks: Climate change, natural disasters, and environmental
regulations pose significant risks to supply chain continuity. In 2022 alone, the
National Oceanic and Atmospheric Administration (NOAA) reported 18 separate
billion-dollar climate and weather disasters in the United States, which led to
widespread supply chain interruptions. Additionally, with the rise of ESG
compliance requirements, companies are increasingly responsible for meeting
environmental standards.
Challenges of Risk Management in the Supply Chain
Supply Chain Risks range from a lack of visibility and collaboration, to resistance, non-
compliance and more. Let’s take a look at some of the biggest challenges in detail.
1. Complexity and Lack of Visibility
According to McKinsey, nearly 80% of supply chain executives have identified the need
to improve visibility by investing in digital planning tools. A lack of insight into suppliers’
processes can lead to unanticipated disruptions and inefficiencies.
To address this, companies should implement integrated technology platforms, such as
ERP systems, which allow for real-time data sharing and communication across the
supply chain. These systems increase transparency and help detect potential issues
early.
2. Inadequate Risk Assessment Frameworks
Many organizations lack a comprehensive risk assessment framework, which is
detrimental to effective Supply Chain Risk Management (SCRM). Without such a
framework, you may miss key threats, leading to vulnerabilities within the supply chain.
The solution is to develop a robust risk assessment framework that incorporates both
qualitative and quantitative metrics. This framework should be adaptable, and regularly
updated to respond to emerging threats and changes.
3. Resistance to Change within Organizations
Introducing new risk management practices can be challenging when there’s internal
resistance to change, and buy-in is lacking across departments.
To avoid such resistance, be sure to foster a culture of risk awareness by training
employees at all levels on the importance of SCRM. Engage leadership to promote risk
management as a strategic priority, and encourage collaboration among cross-
functional teams. Leadership advocacy and team involvement can help embed SCRM
into the company culture, making it easier to adopt new practices.
As Deloitte points out, “Supply chain disruptions will continue to impact global markets,
but companies that embrace predictive risk analytics and diversify their supplier base
will have a strategic advantage.”
4. Supplier Non-Compliance and Performance Issues
Supplier non-compliance with agreed-upon standards and service-level agreements
(SLAs) can lead to costly disruptions and reputational risks. Be sure to establish clear
SLAs and compliance protocols with suppliers and perform regular audits to ensure
these standards are met.
Technology platforms that continuously monitor supplier performance can provide real-
time insights, allowing organizations to address non-compliance issues swiftly and hold
suppliers accountable to agreed standards.
5. Environmental and Regulatory Changes
Environmental factors and regulatory requirements are constantly evolving, leading to
increased risk and complexity. Climate events, new environmental standards, and
regulatory demands can disrupt supply chains and increase compliance risks.
To proactively mitigate these types of risk, stay updated on regulatory requirements and
industry standards, such as those set forth by the National Institute of Standards and
Technology (NIST), by subscribing to relevant alerts and participating in industry
forums. Additionally, incorporate environmental and regulatory factors into the risk
assessment framework.
6. Cybersecurity Threats
From ransomware to phishing attacks, cybersecurity vulnerabilities can disrupt supply
chain operations and compromise sensitive data. Be sure to invest in robust supply
chain security measures and conduct regular security audits to identify and address
vulnerabilities.
Employee training on cybersecurity best practices is also essential, as many security
breaches result from human error. By educating employees and implementing stringent
cybersecurity protocols, you can significantly reduce your exposure to cyber risks.
7. Procurement Strategy and Risk Management
For procurement to manage risk effectively, it must align closely with the organization’s
risk management framework, setting goals that ensure the selection of reliable suppliers
and identification of vulnerabilities throughout the supply chain. This strategy allows
procurement teams to assess suppliers on risk factors like financial stability,
compliance, resilience and scalability.
Challenges in procurement risk management include unpredictable market conditions,
price fluctuations of raw materials, regulatory shifts, and supplier performance
variability. A data-driven approach using historical data, real time insights, and
predictive analytics can help procurement teams make informed decisions and
anticipate disruptions.
For example, monitoring real-time supplier performance data reveals trends that may
indicate future delays, enabling proactive action.
Market intelligence is also crucial, allowing teams to stay updated on supply-demand
trends, geopolitical changes, and regulatory shifts, so they can forecast risks and adjust
sourcing strategies.
5 Key Steps for Effective Supply Chain Risk Management
Creating a robust supply chain risk mitigation framework is essential for identifying,
assessing, and addressing risks that could disrupt your business operations. Here are 5
key steps.
1) Identify Risk:
This first step is critical to developing your risk mitigation framework and involves
several sub-steps:
 SWOT Analysis: A SWOT analysis identifies internal strengths and
weaknesses, as well as external opportunities and threats, offering a
foundational perspective on potential risks.
 Failure Mode and Effects Analysis (FMEA): FMEA helps organizations
prioritize risks by identifying specific failure points, estimating their impact, and
determining mitigation priorities.
 ISO 31000: ISO 31000 provides guidelines on risk management best practices,
offering a standardized approach to identifying, analyzing, and addressing risks.
Effective risk identification hinges on two key factors: involving the right
personnel – from operational staff to risk management specialists – and
gathering essential documentation, such as compliance reports, supplier
contracts, and process manuals, to enable a thorough supply chain risk analysis.
2) Assess Risk:
Once risks are identified organizations need to prioritize which risks to address first. A
thorough risk assessment process evaluates how likely each risk is to occur and the
potential consequences if it does. Consider the following:
 Likelihood and Impact: Assess each risk’s probability of occurrence and the
severity of its impact on supply chain operations.
 Supplier Risk: Given that suppliers play a central role in supply chain stability,
assessing supplier-related risks is critical. Evaluate suppliers based on financial
stability, operational capacity, and compliance with regulations. Consider using
supplier performance scorecards to track key metrics such as on-time delivery,
quality standards, and incident rates. You should also try to assess their potential
resilience. Do they have risk mitigation strategies in place?
 Third-Party Assurance: Verify third-party certifications, compliance, and quality
standards to ensure suppliers meet necessary risk management requirements.
3) Integrate Risk Management into Your Overall Supply Chain Strategy:
Integrating risk management into your strategy aligns supply chain planning and
decisions with risk priorities, enabling faster, more effective responses to disruptions.
Involving cross-functional stakeholders – procurement, logistics, finance, compliance,
and IT – ensures that all risks are considered and fosters a culture of risk awareness
and accountability across departments.
4) Mitigate Risk:
Risk mitigation strategies are essential for reducing or eliminating identified risks and
ensuring supply chain resilience. These strategies should be tailored to each risk type
and its assessed impact:
 Diversification: Avoid dependence on any single source. As noted in “Global
Supply Chains in a Post-Pandemic World” by Willy C. Shih in the Harvard
Business Review, geopolitical risks, such as trade restrictions and national
security issues, are prompting companies to rethink their reliance on single
suppliers. To manage these risks, more companies are turning to multi-sourcing
and diversifying their supply chains. This transition from “just-in-time” to “just-in-
case” highlights the growing emphasis on building supply chain resilience to
withstand disruptions from events like pandemics or geopolitical conflicts.
 Redundancy: Build redundancy into the supply chain, such as maintaining
safety stock or securing secondary transportation routes, to mitigate potential
disruptions.
 Strategic Partnerships: Develop relationships with key suppliers and logistics
partners to improve communication and collaboration, facilitating faster response
times to disruptions. Gartner highlights that in the evolving supply chain
landscape, supplier collaboration has surged in priority, with 88% of procurement
 leaders emphasizing this aspect in the past two years. This trend suggests that
better collaboration with suppliers is a critical tool for mitigating risks and
maintaining continuity.
5) Monitoring and Review:
Ongoing oversight enables organizations to identify emerging risks and adjust mitigation
strategies as needed. Implement real-time data tracking for supply chain performance
and risk indicators. Integrated platforms like ERP systems can provide continuous
insights into supplier performance, logistics status, and market conditions. Be sure to
conduct regular reviews of risk management practices, updating the framework to
reflect new risks or changes in the supply chain landscape.
Strategies for Managing Supply Chain Risk
Effectively assessing risk and building supply chains with lower exposure will reduce the
frequency and severity of disruptions, but not eliminate them. To mitigate the impact
when they occur, companies must also adopt more sophisticated methodologies to
model the effects of specific events.
An innovative approach is the stress tests developed by MIT professor David Simchi-
Levi which revolve around two measures:
 Time to recover (TTR) is the amount of time a particular supply chain node
needs to regain full capacity after a specific shock.
 Time to survive (TTS) is the maximum duration that the supply chain can match
supply with demand after a facility disruption.
Calculating these for a range of possible scenarios helps to assess the financial impact
of disruptions and devise appropriate contingency plans and inventory strategies.
The same applies to supply chains. A common response to recent supply shocks has
been to begin shifting supply from China to local markets. That won’t necessarily reduce
risk, just change the type of risk and increase costs.
For example, UK factories were forced to shut down in March during the pandemic,
while Honda factories in Wuhan were reopening. A China + 1 strategy, now being
considered by many organizations, would have ensured greater resilience at all stages
of the pandemic while also mitigating the cost impact – as long as the +1 supplier has a
distinct risk profile from the Chinese supplier, including sub-tier suppliers not exposed to
China.
Successfully implementing such a portfolio approach requires the right talent and
technology. Procurement and supply chain teams need to continue building the
analytical skills of their teams. Technology can empower these teams by providing
relevant data from internal, third-party and supplier sources to help derive actionable
insights.
1. Establish Nearshore Sources (Friendshoring)
Nearshoring, or “friendshoring,” involves sourcing from nearby or allied countries to
reduce supply chain risk and enhance stability. This approach decreases dependence
on distant or unstable regions, shortens transit times, and improves responsiveness to
market shifts, boosting resilience. It also strengthens trade relationships with reliable
partners, adding predictability in an unpredictable global landscape.
2. Inventory Buffer and Safety Stock Management
A robust safety stock and inventory buffer are crucial for supply chain resilience,
protecting against demand spikes and disruptions to ensure customer needs are met.
An agile supply chain with effective buffer stock management prevents stockouts and
lost revenue, enabling companies to adapt to sudden market changes.
3. Improve Supplier Visibility
As supply chains become more complex, understanding the interconnected web of
suppliers across various tiers becomes vital. Improving visibility across all tiers allows
businesses to anticipate potential risks, enhance transparency, and make informed
decisions on managing supplier relationships and dependencies.
4. Model Worst-Case Scenarios
Building supply chain resilience involves modeling worst-case scenarios to uncover
vulnerabilities and prepare strategic responses. Detailed business continuity plans
(BCPs) enable companies to handle disruptions like supplier insolvency or natural
disasters, ensuring continuity under challenging conditions and better crisis
management.
5. Technological Tools for Real-Time Monitoring
Using advanced technologies like AI, procurement analytics, and predictive demand
models is essential for real-time monitoring and proactive decision-making. AI insights
enable businesses to anticipate disruptions, while predictive models help adjust
strategies and align inventory levels. Regularly using these tools allows companies to
quickly respond to market shifts and maintain continuous supply chain oversight.
6. Regular Supply Chain Risk Assessments
Frequent supply chain risk assessments are crucial for anticipating disruptions and
maintaining resilience. Regular supplier risk evaluations help identify new risks, adapt to
market shifts, and test the strength of mitigation strategies, ensuring long-term stability
and continuity in an unpredictable market.
7. Internal Risk Awareness Training
Internal risk awareness training is essential for effective risk management. Educating
employees about risks and their roles in mitigating them reduces supply chain
vulnerabilities. Training should cover financial, compliance, cybersecurity, and
operational risks, enabling teams to recognize early warning signs and follow best
practices. Regular sessions reinforce risk management as a priority, ensuring teams are
prepared to respond swiftly during crises.

SUPPLY CHAIN SUSTAINABILITY METRICES

What Is Supply Chain Sustainability?
Supply chain sustainability refers to companies’ efforts to consider the environmental
and human impact of their products’ journey through the supply chain, from raw
materials sourcing to production, storage, delivery, and every transportation link in
between. The goal is to minimize environmental harm from factors like energy usage,
water consumption, and waste production while having a positive impact on the people
and communities in and around their operations. These concerns are in addition to
traditional corporate supply chain concerns around revenue and profit.
What Is Sustainable Supply Chain Management?
While conventional supply chain management focuses on the speed, cost, and reliability
of operations, sustainable supply chain management adds the goals of upholding
environmental and societal values. This means addressing global issues, such as
climate change, water security, deforestation, human rights, fair labor practices, and
corruption.
In other words, sustainable supply chain management builds upon traditional practices
by recognizing that sourcing, production, and logistics have far-reaching consequences
for people and the planet. Ecological, ethical, and community-focused goals are, in turn,
prioritized at every link in the supply chain. However, sustainable practices are about
more than minimizing harm; they aim to embed societal and environmental well-being
into business success. The following pillars—green, transparent, ethical, responsible,
and circular supply chains—highlight key strategies for doing so.
 Green supply chain: Reduces environmental impact from sourcing to delivery.
Includes initiatives such as cutting greenhouse gas emissions, conserving water,
reducing waste, and adopting renewable energy sources.
  Transparent supply chain: Provides visibility into the origins of and processes
behind goods and services. Information on sourcing, labor practices, and
environmental impact is shared to build trust with consumers, meet regulatory
standards, and pinpoint opportunities for improvement.
 Ethical supply chain: Verifies that every step of the supply chain adheres to fair
labor practices and human rights standards. This includes combating child labor,
promoting safe working conditions, and guaranteeing that workers receive fair
pay and treatment.
 Responsible supply chain: Emphasizes accountability for the social and
environmental impact of business operations. Involves implementing policies that
align with sustainability goals, monitoring compliance across suppliers, and
taking corrective action to uphold corporate responsibility.
 Circular supply chain: Designs processes to keep materials in use for as long
as possible, reducing waste, maximizing resource efficiency, and minimizing
reliance on virgin resources. Think: reduce, reuse, recycle, refurbish.
Why Is Sustainability Important in the Supply Chain?
Research has shown that supply chains account for the bulk of many companies’
environmental impact. From energy-intensive production processes to the carbon
footprint of global transportation, the supply chain often represents the most significant
opportunity to create meaningful change that extends beyond the organization itself.
Yet achieving supply chain sustainability is no small feat. The complexity of global
supplier networks, border crossings, and various regulations among regions make it
difficult to maintain transparency and accountability. And without clear visibility into
practices such as labor conditions or raw material sourcing, organizations face
significant challenges in ensuring their supply chains align with sustainability goals.
To address these challenges and drive meaningful progress, companies should focus
on key impact areas that directly affect both sustainability outcomes and business
success. These include:
 Environmental impact: Supply chains generally generate significant emissions,
consume large amounts of natural resources, and produce waste. Reducing
energy usage, transitioning to renewable energy, and minimizing waste can
lessen environmental footprints, contributing to global sustainability efforts.
 Supply chain resilience: Sustainable supply chains diversify their supplier
bases, invest in renewable resources, create adaptable systems, and prioritize
local partnerships. This makes them better equipped to handle disruptions, from
natural disasters to geopolitical changes, and ensure continuity.
  Legislation and compliance: As governments worldwide implement stricter
regulations on environmental and social practices, companies must keep up to
proactively meet compliance requirements and avoid penalties.
 Consumer interest: Consumers are increasingly concerned about the ethics
and environmental impact of the products they purchase. Transparent,
sustainable supply chains help businesses attract environmentally conscious
customers and build trust—while improving brand reputation.
Benefits of Supply Chain Sustainability

Supply chain sustainability benefits not only companies’ own interests and those of their
stakeholders but also society and the planet at large. Companies have realized that
climate change, for example, can put their business continuity at risk with extreme
weather disruptions and growing resource scarcities.

Here are five frequently cited business activities that benefit from sustainability:

1. Supply chain operations: Recent examples show that energy costs decrease,
for example, as companies set emission targets with suppliers and help them
identify potential areas for improvement.
2. Branding: Consumers are more concerned than ever about where products
come from and how they’re produced. Researchers at MIT’s Sloan School of
Management found that consumers may pay 2%-10% more for products that
provide supply chain transparency.
3. Investor relations: Institutional investors are keenly aware of the reputational
risk of unsustainable supply chain operations. In recent years, the media has
reported many irresponsible supply chain practices, and in some cases, they’ve
hurt a given company’s stock prices. These accounts have revealed businesses
sourcing electronics from overseas, maintaining hazardous working conditions,
using suppliers that routinely polluted local rivers, and procuring defective
components or toxic materials. It’s also worth noting that nearly half of investors
in a recent Gallup poll expressed interest in sustainable investment funds.
4. Corporate culture: Millennials, in particular, seek greater purpose in their work,
according to demographers. Successfully hiring and retaining employees often
depends on a company’s corporate culture and values, and sustainability plays a
key role in that.
5. Compliance: Governments around the world are mandating greater supply chain
sustainability, in part to meet the United Nations’ 2030 deadline for achieving
Sustainable Development Goals, like clean water for all. Government regulations
 cover many areas, including the traceability of pharmaceuticals, disposal of
electronics and avoidance of conflict minerals.

Necessary Sustainability Key Performance Indicators (KPIs) for

Businesses
Once the business has decided its focus on specific sustainability issues, baselining
and benchmarking are carried out, and the KPIs to measure performance are fixed.
Here are a few sustainability KPI examples that businesses may track to get insights on
sustainability:

1. Supply chain waste

A business must consider the waste generated from the raw materials produced for its
manufacturing of the finished goods to the delivery of the product to the end-user and
how best to reduce it and, where possible, to recycle it. It is measured by the amount of
waste generated, type, and disposal method.

2. Evaluate recycling rates

An organization must assess the recycling rate for materials used in its production and
the warehousing process. A recycling rate is defined as the amount of municipal solid
waste recycled, reused or repurposed and composted of the total generated divided by
the total amount of MSW recycled, reused or repurposed; composted, landfilled, or
incinerated.

3. Measuring greenhouse gas emissions and carbon footprint

A business may use the following three ways to track GHG:

Scope 1:
This GHG is from an organization’s vehicles and facilities.
Scope 2:
These gases are generated by an organization’s indirect consumption of purchased
electricity, steam, heating, and cooling.
Scope 3:
Businesses generate these gases indirectly from purchased goods and services,
employees travelling to and from work, and waste generated in supply chain operations.

4. Tracking energy consumption

The energy used, such as the electricity consumed, the energy used for producing
goods, or the energy used to extract resources, can all be measured.

5. Streamline transportation processes

By adopting technologies such as AI & ML, companies may reduce the GHG to a large
extent by acting on the insights provided, such as identifying suppliers closer to the
production facilities, adopting alternative-powered vehicles, route optimization and the
like.

6. Impact on ecological system

Circularity through innovation is the new mantra being adopted by businesses. By using
biodegradable materials, such as recycled paper or using eco-friendly products made
out of bagasse (sugarcane waste), companies are helping the ecological systems to
grow rather than harming them.

7. Track Products at Each Level

By deploying advanced supply chain and procurement software, products have a

unique ID that companies may track through the value chain. Businesses can track the
product’s development, usage and resale and how it is recycled. These provide
valuable insights for innovations.

8. Water consumption

Consuming water responsibly and avoiding polluting the various water sources is one of
the critical ways to impact the earth’s biological system.
Sustainable key performance indicators include:
 Total water consumed
 Amount of recycled water consumed
 Amount of water wasted
 Amount of water reused
 Amount of water treated before returning it to the ecosystem

9. Material quality check for future value creation

Quality assurance systems reduce resource consumption – material, money and energy
consumption and waste creation. It promotes continuous improvement and innovation in
the value chain through benchmarking, thus ensuring a better quality of products and
sustainability while reducing costs across the supply chain.

Conclusion

In addition to delivering positive environmental impact, sustainable supply chains also

enhance business impact by driving efficiency in supply chain processes besides
reducing operating costs.
Businesses wishing to establish a sustainable supply chain must ensure that the
benchmarks evolve, metrics are fine-tuned, and continuous employee engagement and
training; all these activities go through repeated iterations.