[PART 1] Introducing Supply Chain Risk Management

What is Supply Chain Risk Management?

Supply chain risk management includes the tools, processes, and methods that companies use to find, evaluate, and reduce risks across complex supply chains.

It is a critical part of every organization’s approach to risk management and business continuity planning.

The Association of Supply Chain Management (ASCM) defines supply chain risk management as the “identification, assessment, and mitigation of potential supply chain disruptions” with the goal of minimizing the impacts of supply chain risk on overall supply chain performance. In simple terms, SCRM helps companies avoid surprises by understanding where things could go wrong and preparing before they do.

As the ASCM notes, there are three phases in supply chain risk management:

• Identifying supply chain risks
• Mitigating the impact of potential threats
• Monitoring the supply chain to ensure the threat has been effectively addressed

Operational disruptions directly threaten profitability. According to a Gartner survey of chief procurement officers, 42% named supply chain disruptions as a top procurement risk.

Supply chains are vulnerable to a huge range of different risk factors. Those risks tend to fall into a few major categories.

• Natural disasters and extreme weather
• Geopolitical, socio-political and trade-related risks
• Operational risks
• ESG and sustainability risks
• Supplier bankruptcy and financial risks
• Economic, tax and legal risks
• Cybersecurity threats

These threats are not necessarily disconnected from one another and can result in cascading disruptions.

Extreme weather can cause operational risks, such as airport closures. Changes in geopolitical relations can result in civil unrest and strikes, which in turn can disrupt logistics.

Risk management plays a crucial role within the supply chain. The supply chain is the core of your business. It ensures the proper flow of raw materials for manufacturing. It also supports efficient delivery of goods to customers. This makes the supply chain responsible for maintaining your company’s revenue. Any disruption to that flow can negatively impact your business.

Strategic vs Tactical SCRM

The aim of supply chain risk management is simple: protecting revenue while maintaining the flow of products around the world.

Supply chain disruptions cause production stoppages and logistics delays. These in turn lead to lost sales, directly impacting the bottom line. Repeated disruptions also erode your customers’ goodwill. And delays in deliveries and material shortages can prevent the production and delivery of products that keep the world moving.

Done correctly, SCRM helps you to identify, assess and mitigate supply chain risk. This in turn helps to create a competitive advantage. You gain operational resilience while others scramble to respond to risks.

The performance of your business is directly linked to how well your supply chain operates. Therefore, it is important to manage risks.

Supply chain risk management works best when you use both strategic and tactical initiatives to manage risk.

Strategic SCRM

Strategic SCRM requires looking at the overall risk inherent in your supply chain and de-risking where necessary. In the ASCM definition above, strategic SCRM is about identifying and mitigating risks in the design of your supply chain.

Tactical SCRM

Tactical SCRM monitors daily risks and uses predictive analytics to identify potential disruptions to your supply chain. Tactical SCRM also includes risk mitigation strategies to avoid or lessen the impact of a risk. Therefore, tactical SCRM is, in the ASCM definition, about identifying, mitigating, and monitoring risks in the day-to-day operations of your supply chain.

A Strategic Approach

The setup of your organization’s supply chain footprint has a big effect on your risk profile. Your network design and sourcing decisions can increase or decrease the risks you face.

Some of these are location-based risks. Your supplier could be in an area prone to flooding. You could have a contract manufacturing facility in a country where the risk of child labor is high. One of your main distribution hubs may be in a country where new rules have made customs processing harder.

Some of these location-based risks could be country-wide, or regional; others are specific to a facility itself. For example, your supplier in a flood-prone area could be on higher ground or have strong flood defenses. In such a case, flooding is unlikely to cause a supplier disruption.

How do you measure a supplier’s risk across many factors, from natural disasters to sustainability issues and more? The answer lies in Risk Scoring.

Risk Scoring

It is standard practice to perform due diligence before onboarding a supplier, including financial health checks, and compliance checks. Risk scoring allows you to understand all the external risks associated with a supplier, giving you a 360° view of supplier risk.

It is important to understand what kinds of risk a supplier may introduce into your operations. No supplier is completely without risk. But having a clear understanding of potential supplier disruptions means that you can make better sourcing decisions upfront, reducing the need for firefighting if and when something goes wrong.

Furthermore, it is possible to extend risk scoring to your supplier’s sub-tiers for even more robust and mature due diligence.

A supplier risk score is a numerical rating that quantifies the supply chain risks associated with a specific supplier at a specific location.

The score is a sophisticated aggregation of multiple risk factors, not a single data point. It begins with external risk factors. However, if you can add internal or third-party data sources, you introduce an additional layer of context that can help you make critical supply chain decisions.

External risk factors include natural disasters, political violence, socio-political instability, operational disruptions, risk to individuals, sustainability concerns, economic risks (taxes, economic performance, legal regulations), and long-range climate risk.

Internal risk factors are optional and may include on-time delivery performance, product quality metrics, cybersecurity strength, financial health, and business continuity plans.

Your company’s specific context determines the weighting of risk factors. This means what you source, where you source it from, how critical the material is, and the impact of disruption.

De-Risking Your Supply Chain

Once you have a clear idea of where your risks lie, you can reduce your risk exposure strategically.

The aim is not to have a supply chain that is 100% free of risk. That is not possible. Nor is it necessarily desirable.

Instead, you need to know what your company’s “risk appetite” is. In other words, the level and type of risk that your company is willing to accept.

Network design and sourcing decisions can also help to mitigate risks. That might involve dual sourcing critical components, so that one supplier can fill in if another runs into problems. It might involve carefully choosing inventory locations so products can reach key customers if disruptions affect normal logistics lanes.

Global supply chains have a larger “risk surface” than shorter ones. This is one reason companies may develop regional supply networks or pursue nearshoring strategies for key components.

Inventory policy has a substantial effect on a company’s resilience in the face of supply chain disruption. Large buffer stocks of critical parts let production operations continue even if disruptions affect supply.

Those decisions come with costs, however. This includes tying up capital in inventory, higher operating costs for warehouses, and the risk of being stuck with excess stock if customer demand patterns shift.

Tactical SCRM

Certain risks cannot be designed out of the supply chain. Accidents happen; mistakes are made; natural disasters occur.

Sometimes the benefits of working with certain suppliers outweigh the risk. For example, you could have a supplier in an area prone to earthquakes. Although this is a risk, their goods are superior to suppliers in areas with less seismic activity.

To handle these residual risks, companies need strong tactical risk management capabilities.

Risk Alerting

Supply chain risk management solutions monitor your network for looming threats and disruptive events. Some risks can be predicted. Weather is one of the most common supply chain risks, and one of the most predictable. Forecasts can tell you up to 2 weeks in advance if your network is at risk for weather-related disruptions.

Other risks are unpredictable, such as earthquakes, bridge collapses, or cyberattacks.

However, even if a risk is unpredictable, an early warning of an event gives you a first-mover advantage. This is because you can anticipate or infer the likely cascading effects of the event.

For example, if a port faces a cyberattack, you might expect many of these issues to occur:

• The port under attack will likely be much slower completing import procedures and will probably become congested.
• Many ships will divert to nearby ports, which will likely cause longer dwell times at those ports as well.
• Nearby ports may experience an increased demand for ground transportation from the ports, so price hikes are a possibility.
• If you plan any shipments to be routed through the disrupted port or nearby ports, it is likely that your delivery will be delayed.

The earlier you know about an issue, the more time you have to plan around it. Depending on the circumstances, you might delay shipment, change transportation modes, partly expedite critical components, and so forth.

Scenario Planning

Tactical risk management requires good planning. The best time to respond to a supply chain disruption is before it occurs. The second-best time is as soon as it occurs.

Scenario planning allows you to consider the impacts of the most likely disruptions your supply chain will experience. This means you can create response playbooks for common supply chain disruptions, like logistics or supplier delays.

If you have pre-approved response plans, you can act quicker in the event of a disruption. Once the issue has been resolved, you should assess how well the plan worked. Be honest. Did it work as expected? Was there anything you forgot to consider? Is there anything you would do differently in the future?

By conducting thorough post‑event reviews after each disruption, you will continually enhance your processes and strengthen your resilience over time.

Why Supply Chain Risk Management is Important for Procurement

In procurement, your focus centers on securing the best price and quality. But what happens when a key supplier is suddenly unable to deliver because of a flood, a labor strike, or a financial collapse?

A Gartner survey found that 42% of procurement leaders saw “supply disruptions” as one of their top risks.

Here are ways that SCRM helps procurement professionals.

Risk-Optimized Sourcing Decisions

Procurement teams can use risk scoring to analyze suppliers against external threats such as natural disasters and extreme weather, socio-political risk, ESG and sustainability risk, and more.

You should also consider strategically mapping your sub-tier network for your most important or profitable products. This will also allow you to see potential bottlenecks, such as a single sub-tier supplier supplying multiple Tier-1 suppliers.

This allows you to see if a supplier is bringing an unacceptable level of risk to your organization. SCRM allows you to protect your costs and ensure business continuity as well as create mutually beneficial supplier relationships.

Ongoing Risk Management

While it is not possible to have zero supply problems, predictive alerts give you an early warning of looming threats. This allows you to avoid an issue or significantly reduce its impact.

Ideally, you should create response playbooks for the most likely, or most costly, types of supply disruptions.

Strategically Reduce Buffer Stock

A certain amount of safety stock is necessary. But it does tie up working capital. Plus, there is the risk of obsolescence if buying behavior changes.

By knowing your risks, you can cut buffer stock from safer suppliers and locations. You can also add inventory where problems are more likely.

Avoid Commodity Price Hikes

Disruption can cause commodity prices to surge. Early warnings can help you to secure supply at significantly lower prices. Crop predictions for agricultural products can give you early insight into quality and yield months before harvest season.

Why Supply Chain Risk Management is Important for Logistics

Supply chain risk management for logistics is about protecting profitability. There are other benefits, like increased resilience. But its main value is the money your company saves and the costs it avoids. For logistics, SCRM protects margins, service levels, and customer satisfaction.

Here is how SCRM helps logistics professionals.

Risk-Optimized Transportation Planning

Once your goods are in transit, they are often at the mercy of forces outside your control. Weather, port congestion, accidents, political unrest, cyber-attacks on carriers or ports, and other risks abound.

Therefore, it makes sense to understand any looming threats during the transportation planning phase.

Weather, in particular, is one of the most common logistics disruptions. It is also very predictable. You can get up to 15-day, hour-by-hour, forecasting to help you anticipate weather events that could become problems.

Understand the Reasons for Delays

Sometimes delays are inevitable. An earthquake, a bridge collapse, a fire breaks out at a port. It is not enough to know that your shipment is delayed – you need to know the reasons why. This allows you to keep stakeholders informed and make data-driven decisions on mitigation plans.

Reduce Costs and Scope 3 Emissions while Protect Sensitive Goods

If you ship temperature-sensitive goods, you need to protect them from heat or cold. Sometimes logistics managers default to refrigerated equipment depending on the season. But doing so is costly, both in terms of freight charges and environmental impact.

SCRM solutions with advanced climate intelligence and predictive models can help you select the right level of protection. This is done by forecasting weather conditions along your route weeks ahead of your shipment being tendered. This protects your goods, cuts costs, and reduces your Scope 3 emissions.

[Part 2] Getting Started with SCRM

The 3-Step Supply Chain Risk Management Journey

Effectively managing risks within your supply chain is a critical endeavor that can transform potential disruptions into strategic advantages.

Sometimes companies begin their supply chain risk management (SCRM) journey after experiencing a large disruptive event that was costly to address or resulted in significant lost revenue. Such an occurrence may pinpoint a place to start, so that this threat is less likely in the future.

Other companies may not have experienced a huge disruptive event. However, they understand that by not addressing preventable threats upfront, they lack the necessary efficiency to grow revenue or expand the business.

Risk exists where people do the work. This means that there are risks, large and small, across every part of your supply chain. In a complex organization with multiple business units, global supply chains, and many thousands of suppliers and customers, it can feel overwhelming to know where to start.

Here is one critical thing you need to know: You do not need to have a perfectly mature supply chain to benefit from managing supply chain risk.

Step 1: Find Your Biggest Headaches

It is easy to get overwhelmed by all the possible supply chain risks. Therefore, it is important to focus on your biggest pain points first. Prioritization is essential. You will want to identify where you can make the most impact, demonstrate value, and build a strong case for a broader SCRM initiative.

Assemble a cross-functional team: Your supply chain risk assessment begins with consulting your team members in logistics, procurement, planning, and manufacturing. They are best placed to know what your risk exposure is across their functional areas.

Survey your stakeholders: Ask the team to identify and rank their most pressing challenges. Is it the unreliability of a key supplier, escalating freight costs, or a lack of demand visibility? They have the knowledge of the kinds of risks they deal with most frequently, and the impact these have on operations.

Prioritize the problems: Focus on the issues that are causing the most significant financial losses, operational disruptions, or problems with customer satisfaction.

You don’t have to solve everything at once. The goal here is to agree on the most important things to tackle first.

Step 2: Select a Strategic Starting Point

With your priorities established, the next course of action is to select a strategic area of focus. The “plan, source, make, deliver” framework is a valuable tool for this. It helps you to deconstruct the supply chain and identify where you can make the most immediate impact.

Choose your starting point: Based on your prioritization, choose a starting point. If supplier unreliability is your primary concern, you might begin with the “source” aspect of your supply chain. If transportation disruptions are the main issue, you might focus on the “deliver” component.

Leverage technology to support your efforts: Modern SCRM platforms continuously monitor your supply chain for threats. SCRM solutions offer near real-time data and predictive intelligence, which are invaluable for effectively managing risk. By concentrating on a single area initially, you can demonstrate the tangible value of SCRM. With this, you can build a compelling business case for a more extensive rollout.

Step 3: Broaden and Unify Your SCRM Efforts

Build on your success: After achieving success in your initial focus area, you can expand your SCRM program and integrate it across the entire supply chain.

Break down departmental silos: The ultimate aim is to achieve end-to-end supply chain management. This involves removing departmental silos and creating a cross-functional team that can manage risk from a holistic perspective. This expansion will help create a virtuous circle, where insights from one area benefit others. While some risks affect specific departments, others can impact the entire supply network.

The Benefits of Supply Chain Risk Management

There are many benefits to investing in supply chain risk management software. These include both direct savings by avoiding disruption as well as increased agility, resilience, and operational efficiency. Let’s take a look at these in more detail.

Revenue Protection

McKinsey & Company calculates that supply chain disruptions cost 45% of one year’s profits over a ten-year period. In 2025, analysts estimated that supply chain disruptions cost businesses $184 billion annually. Price volatility for raw materials, high logistics costs, and delays drove this.

Effective SCRM helps companies reduce the impact of disruptive events. This may be by avoiding them altogether or by minimizing the impact of a threat they cannot bypass.

Furthermore, risk signals give you a first-mover advantage that allows you to react faster than your competitors. As a result, you can secure materials or services at a lower price point when disruption is imminent.

Results vary by industry and starting maturity, but leading organizations consistently see improvements in these ranges:

• 30% reduction in revenue losses from supply disruptions
• 5% reduction in expedited freight costs
• 3-5% reduction in buffer stock
• 20-30% less production downtime by minimizing unexpected disruptions
• Avoidance of commodity price hikes during shortages

Increased Resilience

Equally important benefits include strengthening both efficiency and resilience. These generate indirect financial gains by optimizing employee time, elevating customer relationships, and enhancing brand reputation and value.  

Supply chain resilience is the ability to bounce back to normal operations after a disruptive incident. According to the Association of Supply Chain Management (ASCM), supply chain resilience can be improved by: 

• The more potential responses options you have 

• The quicker you can respond 

• Monitoring and controlling supply chain risks 

Supply chain risk management helps companies increase resilience by identifying potential vulnerabilities, de-risking the supply chain where necessary, and running scenario planning for the most likely risks to your operations.  

Larger disruption can impact a whole region or industry. Examples include weather events, commodity shortages, protests, and labor strikes. As a result, many companies are competing for the same resources. 

McKinsey & Company found that most companies take about 2 weeks to plan and respond to supply chain problems.  Early warnings about upcoming disruption allow you to respond quicker, and activate pre-approved playbooks when disruptions occur. 

Typical operation benefits of supply chain risk management include: 

• 50-70% reduction in time required to identify and assess disruption impacts  

• 70% less time spent manually tracking shipments 

• 10% improvement in on-time performance 

• 5-10% improvement in planning efficiency 

• 10-15% improvement in logistics efficiency 

• 60% increase in risk management efficiency 

Improved Sustainability and Brand Reputation

Ensuring ongoing compliance across a global supply network has never been more critical.

SCRM solutions can help you avoid compliance violations and reputational risks, such as child labor, in your supply chain. These can be costly, as well as have a significant negative impact on customer loyalty. It can also help you comply with laws such as the UFLPA and the automotive industry’s new standard, the Supply Chain Due Diligence Reporting Template (DDRT).

Comprehensive monitoring of sustainability indicators allows organizations to identify ESG‑related risks early, support responsible sourcing decisions, and foster stronger relationships with ethical partners. When done well, ESG compliance demonstrates a genuine commitment to social and environmental stewardship. You can enhance customer trust, strengthen brand loyalty, and create long‑term value.

Although these benefits are less quantifiable, they include:

• Stronger brand value
• Reduced exposure to fines and penalties
• Enhanced confidence and trust from stakeholders
• Streamlined, more efficient compliance monitoring and reporting

[PART 3] Challenges and Considerations

The Challenges of Supply Chain Risk Management

Supply chain risk management is not without challenges. These can be managed. But it is important to have a clear understanding of what supply chain risk management can and cannot do.

Challenge #1: It’s complex

There is a tendency to think of artificial intelligence (AI) supported supply chain risk management as an “easy button.” The reality is somewhat different – these models have taken years to build, using decades worth of vast data sets.

Data scientists spend 70-80% of their time exploring, cleaning, and transforming data. They understand that significant decisions will be made based on their AI model output. It takes machine learning pipelines to train, test, deploy, and monitor production models.

There are no shortcuts to building a risk management solution that understands the complexities and interdependencies of supply chain networks.

Challenge #2: You need both AI and human expertise

Both AI and people are required to develop and deploy SCRM solutions. The volume of data and the required processing speed simply exceed human capabilities.

But without the expertise of humans to direct and train the models and to assess and add to the output of the models, the amount of “noise” (irrelevant or repeated alerts) would overwhelm any user. Humans understand the use cases and can build AI to solve them.

Challenge #3: It’s a journey

When starting out, many companies are concerned that supply chain risk management is beyond their capabilities. Consider a manufacturer dealing with hundreds of Tier-1 suppliers and thousands of parts.

They may decide that mapping the entire supply chain, including sub-tier suppliers, is too complex and would take too long to offer value.

They would be correct.

Instead, they need to begin with a much simpler process. For a detailed explanation, please see “The 3-Step Supply Chain Risk Management Journey” section above.

You can start by mapping the facilities that you already know about; assessing these facilities for risks; and monitoring them for potential disruptions.

You could start even smaller by focusing on the suppliers for your most critical or profitable products.

That’s the first step on a multi-year journey. Adding more network data and impact modeling – and the related value – over time will be possible if the right platform and processes are put in place at the start of this journey.

Challenge #4: Build vs Buy

Build or buy? The answer will vary from company to company depending on capabilities but in the case of SCRM, there are few, if any, companies that have the resources to build global event monitoring and risk scoring capability.

Even if you can, you probably should not. Best-in-class platforms have already been built and should be leveraged due to the many other competing demands on a company’s resources.

Defining your SCRM Goals

A single disruptive event can cost as much as $1 million between lost sales, unplanned mitigation costs, production stoppages, expedited freight charges, and so forth.

That would seem to make investing in supply chain risk management software something of a no-brainer. But there are times when you should sit back and consider this question:

What are you trying to achieve?

If the goal is somewhat nebulous, like “agility” or “visibility”, stop and consider what that means – specifically for your supply chain and your daily operations.

Start with a Purpose

Supply chain leaders need a clear vision of what SCRM success looks like to your organization. The goal needs to be more than risk identification.

SCRM is most valuable when insights lead to actions, and those actions lead to desired outcomes.

Ideally, you need to be able to articulate what you want to do, and why you want to do it. Examples include:

Make Departmental Leaders Accountable

Supply chain risk management should become embedded in the way leaders in planning, procurement, manufacturing, and logistics work.

Leaders who own outcomes naturally invest in preparation. They put in the work early by evaluating mitigation options, weighing trade‑offs, and developing plans that executive leadership can pre‑approve.

Align SCRM Goals to Enterprise Objectives

At times, company objectives and departmental KPIs can look like they are at odds with one another. Let’s say three company objectives are: increase profitability; ethical, sustainable sourcing; and building a resilient supply chain.

The goal of ethical sourcing may conflict with the procurement department’s directive to keep unit prices as low as possible.

Keeping unit prices low would seem to be aligned with the goal of improving profitability. Although that is not always the case. The lowest unit price may not produce the lowest total landed cost after freight charges, customs, duties, and other fees are added.

Furthermore, the supplier with the lowest price may lack the financial stability of an alternative supplier, which conflicts with the aim of resilience.

The supplier of the lowest unit price may introduce a level of trade-related, geopolitical risk into the business. This in turn could jeopardize supply chain resilience initiatives.

Executive leadership and departmental heads need to align priorities so that everyone has a clear understanding of the shared mission.

Organizations that invest in SCRM, and enable teams to act decisively, will outperform those that continue to scramble when disruption hits. This is not just about thriving in disruption but gaining a competitive advantage that allows you to gain market share.

As Sun Tzu put it: “In the midst of chaos, there is also opportunity.”

One further piece of advice would be to ask vendors about a specific event. Compare how soon you would have been alerted, and what kinds of information the vendor would have been able to provide you with about the event. This should give you an apples-to-apples comparison between different vendors so that you can find the right one for your needs.

[PART 4] Articulating the Value of Investing in SCRM

Making the Business Case for Investing in Supply Chain Risk Management Software

The pace of supply chain disruption is accelerating. Since 2020, global supply chains have experienced one crisis after another. As a result, operating in reactive firefighting mode is no longer viable for growth-minded companies.

In recent years, geopolitical conflicts have been upending logistics, closing off important shipping lanes and air routes.

Tariffs and trade restrictions have impacted the cost and availability of goods. New rules are announced and then reversed, making strategic decisions very difficult.

Extreme weather events have increased. The Emergency Events Database, or EM-DAT, shows that since 2000, tropical cyclones have caused more economic losses than any other weather category. In addition, losses from flooding have increased 27% in the same period, and now average $42 billion annually.

Earlier we looked at statistics from McKinsey & Company, as well as Swiss Re. McKinsey estimates that companies lose as much as 45% of profits over a ten-year period because of supply chain disruptions. Swiss Re has equally high figures – $184 billion is lost by companies every year because of supply chain disruption.

Those are big numbers, but these do not help you to quantify what disruptions, big or small, cost your organization. Nor does it help you to calculate the potential value of managing risk.

Here we offer some frameworks for both procurement and logistics professionals to calculate the value of managing supply chain risk.

This should help you to make a business case for investing in supply chain risk management solutions, transforming your procurement and logistics functions from cost centers into strategic value drivers.

Procurement: Quantifying the Cost of Production Stoppages

Procurement professionals need to ensure a reliable supply of materials. A disruption in the supply of a critical component can halt production, leading to missed deliveries, unsuccessful promotions, customer churn or lost sales. All of these can have a negative impact on the bottom line.

Many organizations tie up working capital in buffer stock to ensure production continuity. But there is always a tension between “just-in-time” and “just-in-case” inventory replenishment strategies.

Another common strategy is dual sourcing goods. This too comes with costs.

Having said that, both increasing buffer stock and/or dual sourcing may be necessary depending on what you source, where you source it from, and how critical a component is to your final product.

However, it is not financially feasible to hold large buffer stocks or dual source every single component or material. No CFO would agree with that.

But nor would your CFO agree to invest in supply chain risk management without understanding the return on investment.

Procurement leaders can calculate the expected ROI in three different ways:

• Revenue at risk
• Direct costs
• Indirect costs

Revenue at Risk

Every minute that a production line is in operation, it creates value for your company. The converse is also true: every minute the line is down value is being lost.

To calculate the revenue at risk, you need to know the throughput of the line and the wholesale price of the final product.

Consider a disruption your company experienced because of the unavailability of a critical component or raw material.

• How many productions hours were lost per line?
• How many productions lines were impacted?
• How many final products were not completed during the downtime?
• What is the wholesale price of the product?

Determine the number of units that would not be produced during a stoppage and multiply that by the wholesale price.

However, the way that you will do this depends on whether you use discrete, process, or contract manufacturing.

Discrete Manufacturing

Let’s take a very simple example.

However, this is discrete manufacturing, and other parts of assembly can continue while a component is missing. Therefore, the revenue at risk is not the same as the total value. Depending on your industry, you could conservatively estimate it as a percentage of the total value.

One of our customers, a global automotive manufacturer, calculates the revenue at risk as 10% of the total value.

Process Manufacturing

Companies Outsourcing Production to a Contract Manufacturer

This model evaluates revenue-at-risk for companies that use contract manufacturers, where the primary exposure is losing a scheduled production slot rather than experiencing a line stoppage.

The primary risk is missing your allocated production window. You cannot make up for lost time. Contract manufacturers run fully booked schedules.

If you miss your production slot due to missing components, the disruption cost is equal to the total profit you would have made for the period the production slot would have covered.

Direct Costs

Direct costs are the immediate, traceable expenses triggered by the disruption. These typically include:

• Idle labor costs (internal teams waiting on product)
• Overtime to recover downstream processes
• Expedited shipping for replacement components
• Customer penalties or chargebacks

Indirect Costs

Indirect costs reflect the organizational effort required to manage the disruption. McKinsey estimates that companies spend two weeks planning and executing a response to a supply chain disruption.

To calculate indirect labor costs, convert salaries to hourly rates using 50 working weeks:

Depending on your company, one of these may make a better framework than the other; or a combination of two or more may make the most sense for the way your company is organized.

Value at Risk: The Key Takeaway

While you can use any of these formulas to calculate the costs of a disruption, it is more powerful to consider them together. This is your value at risk calculation.

Value at risk = Revenue at Risk + Direct Costs + Indirect Costs

The Logistics Perspective: The True Cost of Unreliable Transportation

For logistics professionals, ensuring the timely and efficient movement of goods is the primary focus of supply chain risk management. Disruptions in the logistics network, such as delayed, lost, or damaged shipments, can have a significant impact on the bottom line. However, many organizations underestimate the true cost of these disruptions by focusing only on the most visible costs.

Lost or Damaged Outbound Shipment

Outbound logistics disruptions are particularly costly. The direct costs of a lost or damaged shipment include the initial shipping cost, the value of the damaged goods, customer penalties, and expedited freight for a replacement shipment.

Delayed Shipment

There are some easy to track direct costs associated with delayed shipments. Question to ask include:

• How many containers were delayed?
• What is the daily detention and demurrage charge?
• How many extra days at D&D?
• Did you pay a customer penalty?

While this can give you an indication of costs, the true cost is much higher. A delayed shipment can lead to lost sales from missed seasonal launches or stockouts, and a history of unreliable delivery can damage a company’s brand and lead to customer churn.

Inbound Logistics Disruptions (Intra Company)

Intra company logistics disruptions can be extremely costly, potentially leading to production stoppages with all the associated costs. In fact, to calculate the potential cost of an intra company logistics delay, you would use the same frameworks that procurement leaders would use to calculate the cost of inbound material disruption:

• Revenue at risk
• Direct costs

Therefore, close collaboration between logistics and procurement is essential to mitigate inbound transportation risks.

From Cost Center to Value Driver

Procurement and logistics have long been viewed as cost centers, but they are critical drivers of competitive advantage. By quantifying the cost of disruptions, professionals in these fields can make a powerful business case for investing in a more resilient and agile supply chain.

This requires leveraging technology and data to gain greater visibility and make more informed decisions. By embracing a proactive, value-driven approach to supply chain risk management, procurement and logistics can be transformed from cost centers into strategic value drivers that protect margins, enhance customer satisfaction, and drive long-term growth.