Volatility Index Underscores Need for Supply Chain Risk Management

In order to succeed as a manufacturing company, you need to ensure that your raw material supply chain remains unbroken. If you use pre-manufactured components, you still need to have your eye on the availability of raw materials because it affects the companies who provide your parts. Investing in supply chain risk management strategies can help you stay on top of global trends in the demand for raw materials.

Global demand for raw materials as well as their availability are both in a constant state of flux. The variability of both supply and demand depends upon several factors, including consumer demand for specific products and suppliers' ability to obtain the materials. Some are almost always available, while others are seasonably available or frequently scarce.

For example, suppose you have a bakery and require flour and sugar to keep your business running. Unless you grow and grind your own wheat, you need to source flour from an outside vendor. Similarly, you need a steady supply of sugar, which may be imported from Brazil. In 2014, Brazil experienced a severe drought that affected its sugar crop, causing a decrease in the availability and a sharp increase in the price of sugar. If you failed to prepare for that kind of hiccup, your business may run into serious difficulties.

Tools like the market volatility index (VIX) can help you to anticipate if and when supply levels for a raw material might drop off or increase. Similarly, it can assist you in budgeting for price increases or preparing to change your vendor entirely. However, supply chain risk management is not just a matter of looking at a single data point. It requires analysis. To properly analyse the supply chain for your company, you need to devote time to it or invest in a supply chain risk management team.

Depending on the size of your company, your team might consist of only one person, or it could include a number or people. If you import materials from variety of geographical locations or different industries, you might assign a member of staff to each supply chain segment to ensure you have contingency plans in case of scarcity.

The volatility index also helps you budget. If, for example, a cyclical weather pattern creates a disruption in the production of one of your key materials roughly every fifteen years, you might put aside additional funds to cover the costs of switching to an alternative source. By ensuring that your supply chain remains stable despite fluctuations, you can keep your production and income flowing, helping you better manage the challenging circumstances.

Supply chain risk management may sound mundane, but it's arguably one of the most hands-on and potentially exciting parts of your business. It's also an important investment in your firm's future. Your supply chain risk management team are the advance scouts for your business and play a vital role in keeping your company economically viable in difficult times.

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