Identifying, managing and reducing Supply Chain Risk

Identifying, managing and reducing supply chain risk (especially if you have thousands of suppliers) has perhaps never been as relevant as in today’s coronavirus and geo-political 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.

Some of the top risks for your supply chain include:

  1. Natural disasters
  2. Geo-political events
  3. Environmental disasters / extreme weather events
  4. Data fraud, cyber-attacks or theft
  5. Biodiversity loss and ecosystem collapse
  6. Sustainability policy and process failures
  7. Financial downturns
  8. Reputational / brand concerns
  9. Regulatory requirements
  10. Shifting consumer trends

A renewed focus on risk management is therefore critical to ensure your business continuity and mitigate vulnerability in the face of various types of operational, financial, compliance and industry risks.

Procura Consulting are deep experts in global and regional Supply Chain Risk Management, with seasoned subject matter experts. We deliver supply chain optimisation, risk management and working capital programmes across any sector and industry.

We typically follow a three-step process to develop a robust third-party risk management strategy for your organisation

Step 1: Understanding and Identifying Supply Chain Risks

Step 2: Managing and Prioritising Risk

Step 3: Reducing the Risk

 

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 entire supply chain map, current spend and future forecasting requirements.

Using relevant metrics, multiple sources of input, and augmented data analysis, 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.

Core component chart

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.
  • Assess if alternative qualified suppliers can supply if the primary supply fails.
  • Determine if the supplier is able to meet production required for forecast sales.

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

When the risks within the supply chain are identified, 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.

The best risk registers contain metrics pulled from multi sources: i.e. a combination of open source data (to help the suppliers time and cost), external (supplier financial performance, social media feeds, news articles and trend forecasts) and internal (interviews, spend data, inventory levels, supplier scorecards, contract data, supplier audit data and surveys).

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 and sustainability metrics, 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.

Historical spend 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
  • Assign accountabilities and escalation routes

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 your business.

Step 3: Reducing the Risk

Steps 1 and 2 provide a framework to identify, prioritise and manage potential risks. Step 3 puts in place strategies and tangible plans 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.
  • Ensure your comprehensive risk mitigation plan is effectively covering short-term, medium-term and long-term risks
  • Ensure accountabilities on both sides are being maintained
  • Continuously learn lessons and enhance your plans, risk register and communications to meet your current and future needs

  • Risk profiling and modelling
  • Risk strategy, mapping and planning
  • Risk data / metrics capture and visualisation (mix of open source, external and internal options)
  • Digitalisation, automation and predictive analytics
  • Consulting services
  • Managed services (white labelled or in partnership)
  • Sustainability metrics capture
  • Benchmarking, Reporting, Dashboards and Tracking
  • Market intelligence
Supply Chain chart

  • Board level visualisation of supply chain and key risks
  • Operational and procurement proactive and collaborative informed decision making to identify and mitigate supply chain risks
  • Cost reduction and optimisation
  • Service level improvements
  • Automation and digital improvements to create efficiencies and cost benefits
  • Supply chain risk profiling, assessments and enhanced resilience
  • Warehouse and network optimisation and efficiencies
  • Improved collaboration and brand ambassadors from the supply chain
  • Enhanced inventory management and working capital improvement
  • New ways of working embedded to enable wider beneficial sustainable procurement initiatives

Contact Us

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