On the Frontlines: Managing Supply Chain Risk

How have recent events intensified supply chain issues?

The Russia-Ukraine war and the COVID-19 pandemic intensified supply chain issues in different ways. The war has raised concerns about disruptions in energy supply, trade routes, and material availability, while the pandemic caused manufacturing disruptions, logistics challenges, and fluctuations in demand. We are learning from these global events how to mitigate the challenges, such as through supply chain resilience measures and global collaboration.

Although the COVID pandemic is thankfully over, the timeframe for the end of the Russia-Ukraine war is still uncertain. The duration for stabilization could range from several months to years, depending on the resolution of conflicts and the ability to adapt to future disruptions, such as the rapid arrival of Generative AI.

Has an increased focus on environmental, social, and governance (ESG) increased supply chain risk?

There are several key considerations for successful ESG integration in supply chains, such as how changes made to implement ESG may disrupt processes and lead to delays and increased costs. Because identifying sustainable suppliers and ensuring responsible practices can be challenging, it can negatively impact product availability and customer satisfaction. Additionally, new ESG regulations require timely adjustments and training to ensure compliance and avoid penalties. Not complying with ESG principles and legislation can harm an organization’s brand perception. Lastly, in order to incorporate ESG integration in your supply chains, there are a lot of upfront investments needed. Market dynamics can affect valuations and financial performance.

Specifically in the pharma sector, one of the more immediate concerns is the environmental expectations that are required from our suppliers and are a clear goal that’s embedded in our code of ethics. Climate, water, and the circular economy are all key concepts that we must actively oversee and control in our daily operations.

How can internal auditors help to identify and mitigate supply chain risks?

Internal auditors play a crucial role in identifying, assessing, and supporting the mitigation of supply chain risks. Supply risk management (SRM) is a process implemented to effectively manage supply risks within the product portfolio. The SRM process involves several steps to ensure comprehensive risk mitigation:

1. Identify and segment the products based on their significance and impact on the supply chain to prioritize risk management efforts accordingly.
2. Establish general protection levels of inventory to ensure an adequate supply buffer for each product.
3. Assess end-to-end risks, considering factors such as supplier dependencies, geographical risk, market conditions, and ethical concerns.
4. Obtain relevant stakeholder endorsements of risk mitigation measures and product-specific target risk inventories.
5. Continuously monitor inventory coverage and the effectiveness of risk mitigation measures.

The successful implementation of the SRM processes helps keep brand risks actively managed. The focus by internal audit on assessing progress in this area greatly mitigates supply chain risk for organizations.

What are some best practices for transparency and accountability in supply chains?

Internal audit can facilitate the integration of SRM into the organization's culture, ensuring a more robust and transparent supply chain. One way is to conduct comprehensive evaluations of an organization’s SRM process. Additionally, by fostering communication between internal teams and stakeholders, internal auditors can work with management to develop a communication strategy that effectively conveys the purpose, benefits, and expectations of the SRM system. They can also play a role in educating teams on SRM, so everyone possesses a strong understanding of the process and can perform their duties effectively in a way that aligns with organizational objectives.

Kees Roks is presenting a session on “Major Disruptions: Dealing with New Supply Chain Challenges” at The IIA’s 2023 International Conference on July 10.