It’s Time to Rethink Supply Chain Risk Management

By Alex Saric | smart procurement expert at Ivalua
Alex Saric: A new, smarter approach to supplier management is required, and here's what needs to be done...

Recent years have highlighted deficiencies in supply chain strategies and the risk that disruptions pose to success.

Efforts by procurement and supply chain teams to keep supplies flowing have prevented extreme disruptions, but have inadvertently created additional risks. Under pressure to quickly identify new sources of supply, due diligence has sometimes been ignored, increasing the likelihood of quality issues, unknowingly supporting forced labour or exposing organisations to fraud.

Trade-offs have been made, such as impeding progress in reducing carbon emissions through using less sustainable products or transportation options.

Supply chain disruptions do more than simply reduce profits today.

They can damage brand reputation, reduce customer satisfaction, create compliance breaches, and curtail efforts to improve our world.

We have a choice.

Some of today’s challenges, such as port congestion or Covid-19, should prove to be temporary. But contentious geopolitics, cybersecurity threats, climate change and other factors will likely only worsen.

Yet business leaders have a choice in this. The default, for those that maintain their current course, is supply disruptions and the results that accompany it. Global supply chains remain extremely vulnerable. Common Supply Chain strategies such as just-in-time inventory exacerbate the impact of shocks.

Sadly, organisational abilities to effectively assess risk and engage suppliers to mitigate it are woefully lacking.

A radical rethink is needed to succeed, to ensure we preserve supply while avoiding the nasty trade-offs and risks of mitigation.

Today’s common reactions are logical to help mitigate the future impact of the recent supply shocks, but not necessarily tomorrow’s. While stockpiling inventory can be effective, it comes at great financial cost.

Meanwhile, onshoring suppliers can help too, but the benefits are limited if only immediate suppliers are local.

A new approach

A new, smarter approach to supplier management is required. To do this, businesses must first adapt their approach to assessing supply chain risk.

Too often, the process is little more than a tick the box exercise on individual suppliers.

It needs to expand to include sub-tier suppliers. Companies are exposed not just to their immediate suppliers, but also to suppliers that their suppliers depend on.

A lack of visibility into sub-tier suppliers is almost universal.

A 2021 McKinsey survey of global supply chain leaders found that 48% have visibility into Tier 1 suppliers, 21% into Tier 2 and only 2% into Tier 3.

To properly assess risk, reduce carbon emissions and avoid ethics violations, leaders must map and assess the multi-tier supply chain.

That requires implementing a process to engage existing and new suppliers to identify and assess sub-tier dependencies.

With large organisations having thousands, if not tens of thousands, of tier 1 suppliers, technology is essential.

Collecting dependent sub-tier suppliers via email at such volumes, mapping them to identify common dependencies and augmenting with additional data to assess sub-tier risk is not practical and prone to error.

Having suppliers directly input the details not only improves efficiency, but also reduces matching errors and allows clear visualisation of the full supply chain.

A portfolio approach to supply chains

With this visibility into risk, companies can then make informed decisions to reduce their exposure – and provides a portfolio view of category supply risk.

We’ve seen that supplier risk management too often focuses on evaluating the risk level of each supplier and selecting lower risk ones when possible.

Taking a category view often means little more than ensuring alternate sources are available.

A portfolio view goes a step further, borrowing from the strategies of investment portfolio managers.

A lower risk, less volatile investment portfolio does not necessarily involve the lowest risk investments, but ones that have diverse risk profiles.

The same applies to supply chains. A common response to supply shocks has been to shift supply from China to local markets. However, that won’t necessarily reduce risk, just change the type of risk, and increase costs.

Successfully implementing a portfolio approach requires the right talent and technology.

Procurement and supply chain teams need to continue building the analytical skills of their teams. Technology can then empower them by providing relevant data from internal, 3rd party and supplier sources when and where needed and help gain actionable insights from it.

Modelling and collaboration required

Effectively assessing risk and building lower exposure supply chains will reduce the frequency and severity of disruptions, but not eliminate them.

To mitigate the impact when they occur, companies must also adopt more sophisticated methodologies to model the effects of specific events.

By calculating from a range of possible scenarios, organisations can more accurately assess the financial impact of disruptions, identify where weak points are located and develop contingency plans and inventory strategies.

Businesses must also improve the nature of supplier collaboration. Supply chains can be both more efficient and more resilient with greater transparency into supply and demand.

That requires real time sharing of information from both buyers and suppliers. Greater willingness to share details helps suppliers better plan their own supply chains.

With the right willingness, buyers can leverage existing Spend Management systems, where buyers and suppliers are already logged in to manage contracts, orders, and payments.

This will help efficiently share information such as planned orders, forecasts, estimated delivery dates, ensuring all parties have full transparency.

Supply chains are increasingly critical to success or failure.

Managing risk creates a significant competitive advantage, improving financial results while also avoiding ethics breaches and helping improve sustainability.

Companies must rethink how they assess, mitigate and model risk.

While no risk management approach will be optimal in every scenario and for every business, there are some common lessons to consider.

And the path forward requires changes to our talent and processes, with the right technology.

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