Identifying, managing and reducing supply chain risk has perhaps never been as relevant as in today’s coronavirus affected world. In fact, in Procura’s “Covid-19 Procurement Impact” survey, 87% of respondents signified that they had experienced negative impacts to their supply chains, with key issues outlined ranging from supplier liquidity/insolvency to logistics availability.

A renewed focus on risk management is therefore critical to ensure business continuity in response to both novel and existing issues such as local lockdowns and commodity shortages. Here, we propose a simple methodology to develop risk management in your organisation and build resilience in today’s volatile business environment.

Step 1: Understanding and Identifying Supply Chain Risks

In order to reduce and manage risks, any organisation first needs to have a firm understanding of its supply chain map, current spend and future forecasting requirements.

Mapping your supply chain by each product and/or service line will reveal the key components and suppliers that the business is dependent on and show quickly where single source or geographical dependencies exist. As part of this analysis, understanding size and location of your supply base is also critical; deeper focus should be on those suppliers which are a high proportion of spend or are the single source for a particular good/service critical to the production/service process. Lastly, if exact supplier capacities are unknown, analysis should be completed on forecasted requirements against supplier size and existing spend, to discern the likelihood they might be able to meet short or long term increases in demand.

Venn charts

Key actions for identifying risk:

  • Determine the spend dedicated to each supplier in relation to their size/capability.
  • Locate the supply base, and research the geopolitical context of their locations.
  • Forecast the revenue dependent on these suppliers and their products/services.
  • Asses if alternative qualified suppliers can supply if the primary supply fails.
  • Determine if the supplier is able to meet production required for forecast sales. Are they aware of any increase/decrease?

Through this initial process then, business critical supply relationships can be discerned, and potential risks begin to become apparent.

Step 2: Managing and Prioritising Risk

Now that risks within the supply chain are better understood, it is important to begin to proactively manage them to avoid potential shocks. Prioritising outlined risks in a risk register is a good place to start, so that your efforts are focussed on the larger risk areas, followed by introducing formalised and regular account management or supplier relationship management. It is important that the scale of your risk mitigation activities is consistent with your business’s capability, i.e. how much resource can be dedicated now and in the future to these activities? This, in essence, is why prioritisation is fundamental to success.

A risk register contains scored assessments (1-5, for example) of the suppliers you have previously identified, and any specific risks that have been highlighted. Some generic criteria should include likelihood of risk occurring and impact to the business if the risk occurs, and more business specific criteria, such as what is the supplier’s dependency on the buying organisation and whether a supplier has the capacity to meet your production forecast.

Follow up the register by building closer and more formalised relationships with your key suppliers. Holding regular, perhaps monthly or quarterly, discussions about your ongoing business with suppliers, not only just when things aren’t going to plan, can yield significant benefits for your organisation. These includes both measurable factors, such as price or payment term improvement, but also less tangible factors, such as information sharing on proposed forecasts, new product launches or innovation ideas, which can reduce risks, as the supplier can react proactively, whilst even creating further value by fostering collaboration and enabling a forum for dispute resolution.

Step Chart

Key actions for managing risk:

  • Develop risk register and criteria, and score outlined risks from stage 1
  • Prioritise outlined risks based on your company specific scoring methodology
  • Implement formal account management and build stronger supplier relationships

Moving through Step 2 of this framework then sets out a quantitative, risk register, and qualitative, account management, method for beginning to manage risk inside you business.

Step 3: Reducing the Risk

Steps 1 and 2 have provided a framework to identify, prioritise and manage potential risks, but what are some strategies moving forwards to reduce these risks? There are a number of short/long term options to consider, such as contracting with KPI’s/SLA’s, operational risk mitigation and strategic risk mitigation.

Smaller and/or fast-growing organisations may have little to no contractual arrangements in place with suppliers. Contracting the provision of your key components or services is an excellent way to provide structure to a supply relationship, provide a legal basis of which to protect the business, and build mutual understanding of formal obligations between two parties. Furthermore, the acceptance of a Service Level Agreement, on expected lead times and quality, for example, alongside Key Performance Indicators to measure and track supplier performance (useful in your scheduled account management meetings) enable you to hold suppliers to account and create targets for improvement. This could even mean moving supply, if your current supplier isn’t performing!

For short term, quick wins, operational risk mitigation strategies, such as stock holding at either the supplier or internally, can reduce risks in single source supply or areas with long lead times, for example. Work with your suppliers to build buffer stocks until more planned initiatives can be undertaken and build this into contracts where possible.

In the longer term, strategic risk mitigation activities should be completed in high risk areas of your supply chain, such as where there is significant single source or geographical dependencies. This might include diversifying your supply base by qualifying alternative vendors for specific components, or even creating an entirely new supply locality in a new continent to serve new sales markets and reduce dependency on any particular countries.

Key actions for risk mitigation:

  • Put in place contracts with agreed SLA’s and KPI’s with key suppliers.
  • In the short term, use operational initiatives to reduce likelihood of shortages.
  • In the long term, use strategic initiatives to reduce supplier dependencies.

Conclusion

In summary, the three steps discussed here form a framework for identifying, prioritising and ultimately reducing risks in your supply chain. A core understanding of your supply chain map and costs underpin risk register methodologies and enable targeted account management, contract placement and further short/long term risk reduction activities.

To discuss the content of this article in more detail, or to see how Procura’s procurement expertise can help you develop a framework for risk management in your organisation, please get in touch:

Email us: info@procuraconsulting.com

Call us: +44 (0)203 693 7275

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