How to Hedge Yourself for Sustainability Risks in Your Supply Chain
Risk is a part of any business. Put simply, there is always a chance that the actual outcome will differ from what was expected, and that includes the prospect of losing out on your original investment.
Take Covid-19, which was difficult to mitigate against. Many supply chains were affected worldwide, leading to shortages of everything from hand sanitizer to toilet paper in a number of countries across the globe as panic and uncertainty overtook the populace. Of course, the majority of supply chain risks now derive from environmental concerns, or other external factors. There are various ways to hedge against these risks, which we will discuss below.
For everything you need to know about how to hedge risks in your supply chain, we have come up with a detailed overview of what to expect, and how to better protect a business.
How to Proceed with Supply Chain Risks
Which risks are more likely to affect your business specifically? It’s the most important question when deciding how to proceed with various potential issues relating to a supply chain.
Risks will vary depending on a number of factors, including which country you operate in, the products you produce and sell, and the sector your company operates within. For example, India will have different guidelines and regulations compared to a country like France, while clothes manufacturers and supermarkets will have needs that may overlap, but they won’t be the same. As such, there’s no one-size-fits-all approach which can be taken to ensure minimised risk.
For the basics, there are two main types of risks that are associated with any business:
External risks — those that are outside of your control
Internal risks — those that are within your control
External risks include issues relating to supply, such as interruptions to the flow of product within a supply chain. If there’s a plant, risk could arise from a poor physical facility, or failure to conform to regulatory compliance.
Internal risks include a lack of transparency, or hiding information that could potentially be damaging.
When beginning the process of supply chain risk management, it is recommended to document the process with the use of a risk management plan. This is a document that will allow managers to foresee and define any risks, as well as estimating the potential impact.
Good quality supplier data is the cornerstone of a transparent supply chain and understanding its risks. Getting a hold of data from suppliers and sub-suppliers is oftentimes a challenge. Download our guide to find out how to boost your supplier response rate with a few simple steps and gain the data you need for a transparent value chain.
The Risk Indices
There are a number of companies and organisations which can help to give a company a better idea of their current level of risk. Many collect and combine lots of information to help companies to understand current and future risks.
The Organisation for Economic Co-operation and Development (OECD) - An organisation which aims to ‘promote policies that will improve the economic and social well-being of people around the world’
Amfori BSCI - BSCIprovides companies with a social auditing methodology and report. It does not organise audits itself but ‘provides a network of external accredited, experienced and independent auditing companies’
Transparency International- Transparency International is a ‘global movement [that] works in over 100 countries to end the injustice of corruption by promoting transparency, accountability and integrity’
Maplecroft - Maplecroft is ‘a leading research firm specialising in global risk analytics, country risk insight & trusted advisory’
Maplecroft takes a data-driven approach, with “risk indices and predictive analytics [that] are designed to eliminate bias and uncertainty to give you the confidence to act based on independent data you can trust.”
They provide structured human rights risk data, with each index updated either quarterly or annually. When combined with internal risk hedging, they can help to build up a more complete picture of how a situation will potentially unfold. Potential benefits include being able to communicate risks to the public effectively, as well as understanding how risks are changing over time. This will allow for better decision making, and more effective hedging.
By reporting on international risk indices, like Corruptions Perception Index (CPI), or Yale Environmental Performance Index, for mitigating corruption and environmental risks, you ensure that you follow legitimate and reliable standards that help you identify pitfalls in your supply chain. Read more about Worldfavor’s solutions, Sustainable Sourcing, Supply Chain Visibility, and Kickstart, and how they allow you to follow risk indices to find risky business in your supply chain.
Hedging for Risks: Supplier Levels
Depending on the size of your supply chain, it can be difficult to understand exactly what risks may affect the business. From sub-suppliers, to differences in procedures or guidelines, there are various potential problems that may arise.
We have discussed the four stages of supply chain transparency in the past, and why it’s necessary to better understand exactly where your raw materials are being shipped from. After all, if you don’t know which countries and companies are included in your supply chain, it’s going to be extremely difficult to effectively hedge against any risks.
In case you aren’t sure about the stages, it begins with internal operations, leading on to dealings with direct suppliers, sub-suppliers, and lastly the raw materials themselves. More knowledge about each level is necessary to use the risk indices properly, especially when looking at plant locations, and adhering to regulations or new guidelines.
Hedging for Risks: Conclusion
A resilient chain will be able to hedge against most risks, including supply, demand, and pricing. It will be different for each business depending on factors such as their region or their product, so it’s always worth taking the time to learn more about additional tiers, or the raw materials themselves.
External risks are difficult as they’re out of your control, but a better understanding of your supply chain is a good place to start with. There are a number of organisations that can help in terms of data and analytics, but there’s only so much that they can do if you only have information about internal operations and direct suppliers. Knowledge is the key to hedging against supply chain risks, and that’s true all the way down.
If you are just starting out, Worldfavor Sustainable Sourcing Kickstart is a ready-to-use solution that can help you get going in no-time. Get a full-fledged supply chain sustainability risk assessment in just weeks using best practice process, self-assessment forms and risk analysis models. You only need to know who your suppliers are – the platform takes care of the rest.