Supply chain disruptions can arise from many sources — and oftentimes without warning. These disruptions can be entirely external, such as a natural disaster, or they can be internal, rising from the failure to integrate all functions in a supply chain. Disruptions also can result from attempts to create a more efficient, cost-conscious supply chain environment.

A supply chain must be fully integrated to operate at maximum efficiency. Failing to understand the potential vulnerabilities can compromise the supply chain's ability to handle unexpected and sudden shocks. By understanding risk within and external to the supply chain, an organization can more clearly identify its options for optimizing the supply chain to ensure viability and strength.

Companies today are heavily dependent upon the smooth operation of other players within the supply network. This means that supply chain management initiatives can no longer be confined within the "four walls" of a single operation. Rather, they need to embrace the extended supply chain — that is, their customers and suppliers as well as their customers' customers and their suppliers' suppliers.

Attempts to drive costs out of supply chains through such methods as decreasing inventory, single sourcing of raw materials, or adopting just-in-time (JIT) manufacturing and delivery techniques also can add to the complexity of supply chain risk. But many organizations fail to take into account the inherent risks of such initiatives. In striving for efficiency, companies can inadvertently introduce risks into their supply chains. Just-in-time, for instance, can become "just-too-late" if something goes wrong and there is no safety switch built into the supply chain.

Whatever their cause, supply chain disruptions can have an enormous ripple effect. The results of supply chain disruptions can be financial, political, economic, and social. But the ability to more effectively manage the supply chain by understanding the potential impact of such disruptions can create a strategic advantage in a competitive marketplace.

What Will You Say When They Ask What Happened?
To better manage the risks around their supply chains and thereby limit the financial impact of a supply chain disruption, senior management should be asking the following questions:

• Do we fully understand the dependencies within our supply chain?
• Have we identified the weak links within our supply chain?
• Do we understand the risk that has been inadvertently built into our supply chain?
• Have we identified the supply chain risks that we might be able to mitigate, eliminate, or pass on to another supply chain member?
• Do we incorporate the element of risk when making strategic or tactical decisions about our supply chain?
• Is our supply chain nimble and flexible so that we can take advantage of both supply chain risks and opportunities?
• Have we fully captured our enterprise-wide risk profile?
• Do we know which supply chain risks may cause an adverse event that could cause a significant disruption to our supply chain?
• Do we have the necessary tools, skills, and resources to model our supply chain, including its risks and vulnerabilities, in order to understand the financial impact that various events and scenarios will have on our supply chain?
• Do we benchmark the activities that make up our supply chain?
• Have we identified — and do we monitor — key risk indicators of upstream or downstream activities that might result in a disruption in the supply chain?
• Have we fully integrated our business contingency plans and emergency response plans into our supply chain management initiatives?