Supply Risk

Supply risk is the probability and severity of a partial or total disruption to the supply of resources that an organisation or territory depends on, such as water, raw materials, energy or components, which prevents it from meeting its objectives. It is assessed by combining factors such as physical availability, external dependency, price volatility, geopolitical exposure and infrastructure vulnerability.

For companies, supply risk has moved from a purely operational concern to a strategic and sustainability issue, because resource scarcity, climate impacts and concentrated supply chains can interrupt production and raise costs.

A framework for assessing supply risk

Most assessments combine three dimensions:

• Exposure: how dependent the organisation is on a resource, including the share that is imported and how concentrated suppliers are (often measured with a concentration index such as the Herfindahl-Hirschman Index, HHI). For water, local scarcity can be weighted with the AWARE factor.
• Vulnerability: the lack of alternatives, including how many suppliers exist, how critical the resource is to production and whether substitutes are available.
• Impact: the consequences of a disruption, from the cost of downtime and lost sales to reputational and regulatory effects.

Key indicators

• Water Dependency Index (WDI): exposure to water as an input.
• Footprint Displacement Index (FDI): impacts shifted to suppliers and other regions.
• Supplier concentration (HHI): how reliant the organisation is on a few sources.
• Safety stock and lead-time ratios: the buffer available before a disruption bites.

A step-by-step approach

1. Map the supply chain: identify suppliers across tiers, plant locations and logistics routes.
2. Assess each resource: apply scarcity, dependency and criticality factors.
3. Model scenarios: test events such as a severe drought, a geopolitical conflict or a transport disruption.
4. Quantify the impact: estimate production losses and cost effects.
5. Build a risk matrix: combine probability and impact to classify risks as low, medium, high or critical.

Mitigation strategies

• Diversify suppliers: reduce dependence on a single source or region.
• Secure long-term contracts: including power purchase agreements for renewable energy.
• Hold safety stock and consider reshoring: for the most critical inputs.
• Invest in substitution and circularity: alternative materials and recycled or secondary inputs reduce reliance on primary resources, in line with circular economy principles.
• Collaborate upstream: support suppliers in improving water and resource efficiency.

Regulatory and reporting context

• CSDDD: the EU due-diligence directive requires large companies to identify and address adverse impacts in their value chains, which includes resource and supplier risks.
• EU Critical Raw Materials Act: aims to secure the supply of strategic materials by diversifying sources and boosting recycling.
• CBAM: the EU Carbon Border Adjustment Mechanism affects the cost of importing carbon-intensive goods, a factor in sourcing decisions.
• ISO 28000: an international standard for security and resilience in supply chain management.

Managing supply risk is essential for operational continuity and competitiveness in a world of constrained resources. At Manglai we help companies measure their environmental impacts and prepare their sustainability reporting, including value-chain risks. Discover how Manglai can help you.