A guide to supply chain risk for the apparel industry

November 25, 2020

In 2020, a year of wild uncertainty, the importance of managing risk across the supply chain for the apparel industry is hard to overstate. Finding the right business partners and building the most resilient supply networks have become the most pressing priorities. But just as fools rush in, adapting to the impact of the pandemic is not merely a matter of responding fastest. It requires a strategic approach in taking a step back, understanding the risks throughout your supply chain, and planning deliberately with a long-term perspective. 

Adopting this approach will not only build the resilience of the supply chain but also keep operations streamlined. Below you will find a walkthrough that we developed to aid those wanting to embrace this process.

What is supply chain risk?

By definition this is any factor, whether internal or external to your business, that creates an unwanted disruption to your supply chain. It is a classification of risk particularly relevant to the apparel industry, renowned for its complex global supply chains. Like financial risk and other key areas, supply chain risks cannot be altogether avoided, but they can be effectively mitigated. 

Types of external supply chain risks

This category of supply chain risk has been front and centre throughout the year in the wake of the pandemic. Exposure to external risks can occur both upstream and downstream in a supply chain and revolve around market, environmental and business factors. Variations include:

Supply risks arise from a lack of access to material inputs needed for production. When interruptions to supply occur, they can result in delays and strained relations with clients.

Demand risks are associated with misunderstanding the market pull for your products. They can occur from a lack of insight about purchasing trends as well as unforeseen changes to the demand landscape. 

Environmental risks are when your supply chain is adversely affected by economic, political, ecological or social factors. Notable examples include the China-US trade war and the COVID-19 pandemic.

Business risks occur when there are unexpected changes to the financial health or governance of your partners, affecting your ability to work with them as usual.

Types of internal supply chain risks

Unlike external risks, internal risks are predominantly within your control. They can be identified by auditing your workflows, communications, planning and processes for what is working and what  could be improved. 

Manufacturing risks are any possibility of disruption to your production or workflow. They can derive from poor or malfunctioning equipment, overworked labour, inadequate production oversight and many other sources.

Business risks in an internal context concern changes that will inevitably affect the way you interact with your stakeholders and business partners. Examples include replacing key members of your management team or instituting new customer communications protocols.

Planning and control risks derive from an inefficient or inaccurate assessment of the needs of your business, with the results ranging from purchasing unnecessary equipment to wasting productive inputs.

Mitigation and contingency risks flow from a lack of planning for supply chain disruptions. Preemptively establishing a response protocol can reduce the time needed to return to normal operations.

Learn more here.

Mapping your supply chain for risk exposure

Are your risks upstream or downstream? Are particular suppliers or markets showing red flags? Creating a risk map of your supply chain will help you track where points of concern may be emerging and provide a much higher degree of transparency. 

For example, keeping a pulse on the trade policies affecting the countries you import to and export from is a good way to stay ahead of materialising risks. If the costs become prohibitive for whatever reason, you should be prepared to shift your trade corridors to keep your operations running smoothly.  

Similarly, it is important to be familiar with the countries your orders normally transit through. If one of them is particularly prone to disruption, whether natural or man-made, it is wise to have an alternative route to switch to if the need arises.

Supply chain mapping can also help you identify emerging risk areas. For example, the cost of cybercrime globally is estimated to exceed 6 trillion dollars by 2021, up from 3 trillion in 2015.  This means as digitalisation continues to occur across the apparel industry with many companies realising the competitive benefits this will bring, there is also a need to take measures to protect themselves and their supply networks from cyber-attacks.

A further benefit of mapping is to track the efficiency of freight carriers. Metrics like transit times, average load times and maintenance schedules can help you understand how optimally your partners are getting your orders to their final destinations.

Developing a framework for supply chain risk management

A quality supply chain risk map will break down the elements that need management, which is then best done by developing a framework. One of the most common for managing supply chain risk – the so-called PPRR model – revolves around four pillars:

Prevention has to do with implementing measures to mitigate or avoid potential supply chain risks from materialising. 

Preparedness concerns developing a contingency plan in the event of a supply chain disruption. This is sometimes called being ‘risk ready’.

Response is about executing on your contingency plan to reduce the negative impact should a disruption materialise. This requires excellent communications amongst the parties involved, so that there are no questions over responsibilities when the time comes to act.

Recovery involves the steps needed to resume operations as quickly and efficiently as possible. This can be everything from the efficient allocation of resources to tapping into alternative suppliers for production inputs. 

The aim of this process is to build supply chain resilience, which according to research from the consultancy Bain, can deliver improvements of between 15% and 25% in manufacturing output and 20% to 30% increases in customer satisfaction due to higher perfect order rates.

Using technology to manage risk effectively

It is important to differentiate supply chain risk management from overly defensive risk mitigation, as this can restrict progress. If you entirely remove smart risk taking then you are in danger of limiting innovation which could be detrimental to your growth potential. The advancement of technology has broadened the horizon of what is possible in risk management and can ensure you have the information needed to take these vital calculated risks. For example, predictive analytics and data modelling can help garment manufacturers conduct scenario analysis to better understand the risks they face. This is a boost to contingency planning, as you can evaluate a much wider range of possible outcomes from any particular risk materialising along your supply chain. 

Predictive analytics is also being applied to create alerts in-advance which use algorithms to notify key decision-makers about spikes or slowdowns in demand. Such early warnings can prompt more proactive warehouse and distribution management, order collaboration and logistics management

Cloud-based supply chain applications are growing in adoption, as they facilitate information sharing and greater transparency across a supply chain. The more informed you and your partners are about the conditions at each link of the process, the better the decision-making will be.

To help companies more effectively assess their counterparty risk, we have begun partnering with risk management solution providers across the apparel and risk technology ecosystem. Find out more about our first partnership with Coface and register for more information. 

If you’re interested in learning more about risk management and other topics related to the apparel industry, registered companies can join Serai today. Click join, submit some basic information about your company and get started.

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