Multi-tier supply chains and the related risks

The supply chain of the 21st century is global and complex. The days of standard local sourcing, a single manufacturing unit, and structured distribution are gone, as consumer demand requires products to come to market faster than ever. Arguably, the traditional supply chain no longer exists, as we see multiple levels of manufacturing and development to create a product or service. Several relationships happen simultaneously, each with their critical success factors, within the supply chain, potential involving hundreds of different companies.

Furthermore, Covid-19 adds disruption to big and small supply chains, not only those that connect to the massive global manufacturing sector of China, where the virus hit first. Businesses are feeling the pinch from halting operations, dealing with a shortage of supplies, and a general lack of demand.

 

BearingPoint Partner, Chetan Rangaswamy, says there are two things companies can look towards for assistance during the crisis. The first of those is to invest in visibility tools to help gain knowledge of your supply chain and how all parts of it interact. Secondly, with additional visibility, you can get a view of the strengths and weaknesses of your suppliers. It is crucial to know the benefits and risks beyond your first-tier supply line, extending through multiple levels of the chain.

 

A multi-level supply chain has a raft of challenges. As businesses need to work at speed, even having visibility of the network stakeholders seems an impossibility at times. In addition to this, consumers now expect companies they purchase from to have a deep understanding of product journeys. For example, if you buy a piece of meat, you want to know where it came from, how it got to the shelf and the conditions along the way.

 

What is a multi-tier supply chain?

The multi-tier supply chain is a single network of multiple relationships between buyers and suppliers. Due to globalization, it is now a key strategic driver to lower costs, reduce capital assets, and get products to market before the competition. However, the lack of visibility is innately associated with risk and a lack of control. In a multi-tier supply chain, the key to planning and execution sits beyond the walls of the enterprise, meaning any problems are outside of the company’s hands. In the majority of cases, visibility ends after Tier 1 suppliers.

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Source: CGM Global

 

While the multi-tier supply chain is a necessity for businesses to scale-up, it needs to be well-governed through effective risk management practices.

 

Multi-tier supply chain risks

As well as the need for speed and consumer demand, multi-level supply chains come with other risks that companies need to manage carefully.

 

We have spoken about visibility above, but it is essential to reiterate this as a major pain point when trying to understand supply chain risk. Identifying suppliers and their role within the chain is tough and requires a significant time investment. Companies are now able to achieve this using data, such as this case study, which helped to uncover information of over 15,000 unique suppliers. The company was able to gain insight into supplier activity, and it enabled them to optimize their supply chain.

 

Risks are sometimes tricky to interpret. For example, the Covid-19 pandemic is unprecedented but has had an enormous impact on supply chains. In the healthcare sector, firms looking to source protective equipment have hit barriers where they did not prepare for factory closures and complete line failures. Preparing for unknowns is a challenge where they are hard to address, but better visibility of the supply chain is a starting point.

 

We are still in a time where the use of data within some industries is quite immature. For example, with a complex product, Tier 1 and 2 suppliers see their supply chain as proprietary and want to limit the visibility of a manufacturer. However, if one of those lower-level suppliers has a problem e.g., they go bankrupt, a company without clarity cannot be proactive. 

Reputational risk must be a consideration within a multi-tier supply chain. For example, a few years ago, the employees of Foxconn, a manufacturer of electronic devices for firms such as Apple, threatened a mass suicide due to poor working conditions. Apple was implicated in this through supplier association, damaging their reputation in the process. While this is an extreme example, the point is that without having better visibility of the entire supply chain, reputation could be at risk.

 

Companies with a complex supply chain that don’t have tools to gain extra visibility will need to embrace new digital technology if they are to mitigate the associated risks of a multi-tier network. They must get as much information as possible regarding the status of Tier 2 suppliers and beyond, allowing maximum time to work with the primary Tier 1 suppliers on alternative plans. Investing in data and digital platforms are becoming fundamental to do this, to proactively keep plants running at full efficiency within the supply-side constraints.

Achieving visibility of a multi-level supply chain is difficult, but it can reap serious benefits to all those involved.

 

Improving resilience

It’s impossible to make a supply chain more efficient if you don’t know who is involved. Using data to get a better view of your network can highlight if weaknesses exist. For example, you may discover that there are suppliers below tier 2 in countries prone to natural disasters and plan accordingly. Well-informed risk management plans can account for unprecedented events.

 

Create a USP

If you understand every tier of the supply chain you could turn that into a unique selling point. For example, every stakeholder in the chain may follow organic practices, which could be a massive plus for the end customer. If there is one supplier not following such practices, it gives the opportunity to replace them.

 

Responding to risk

Data can provide information that allows you to be proactive with risk. While Covid-19 is unprecedented, if a company understands the way it impacts suppliers at all levels, it is far easier to take action. In the case with Apple, they may have been able to mitigate any issue before it arose.

 

The best risk management practices are proactive, but that doesn’t mean to say businesses should not prepare themselves to react in the event of a crisis. Having visibility of a multi-tier supply chain allows you to quickly identify the root cause of a problem and deploy adequate solutions before it escalates. For example, if a product requires recall or there is a packaging problem, you should be able to understand precisely how that filters through the chain and take immediate action.

 

Pleading ignorance at the time of a safety or human rights incident isn’t an acceptable response at a time when we have data and technology available in abundance. Granular transparency of the multi-tier supply chain means every business can equip themselves to cope with potential risks, rather than relying on immediate suppliers to manage the potential fallout.

 

Innovation and collaboration

Enhancements in technology and connectivity over the last decade are making supply chain visibility a reality. Given that there could be hundreds of stakeholders within a network, communication is crucial for coordinating activities. For example, if there is a shortage of a specific component, more data may be required so that every level can adjust their operations to fit with market demand.

 

Cloud computing ensures that all parts of the supply chain can get the necessary collaboration, improving their visibility. As data stored in the cloud can be viewed from anywhere, the flow of information is quicker than it has even been, creating effective measurement and responses that ultimately reduce risk. If demand for a product changes, the entire supply chain can know the details in real-time.

 

The benefit of digital innovation and collaboration is a seamless supply chain, where information transfers at speed to mitigate shortages and accelerate lead times.

 

Sustainability

Society has an exponentially growing focus on sustainability. Internal and external stakeholders want complex supply chains to take responsibility for creating sustainable products. With that in mind, visibility is crucial in maintaining sustainable integrity, primarily as multi-tier supply chains are operating on an international level.

 

To achieve a sustainable supply chain, environmental, social, legal, and economic concerns must be addressed throughout every tier. A holistic approach will avoid cases like the example of Apple, while also reducing and waste and the environmental footprint.

 

Some companies don’t like too much visibility

When companies start to get more visibility of their supply chain, it can be intimidating as it reveals both positive and negative aspects. For example, you may uncover unsustainable practices that reside deep down, which, if left in situ, will result in misconduct or reputational damage.

 

A deeper understanding of supply chain practices, including their policy on corporate social responsibility (CSR), helps to build ethical processes. CSR is becoming a unique selling point to help companies stand out from the competition. However, you can only claim to be corporately responsible if you have transparency in the supply chain. The extended supply network can provide important information that backs up your claims, such as details on working conditions or certifications.

 

Improving supply chain visibility

 

Three key areas can help to improve supply chain visibility.

 

1. Managing data

Create an environment whereby data going into systems is high-quality, clean, and accurate. Each supplier within the chain should be able to self-service their information, view details about the network, and trust the supply chain practices. Use tools to cleanse the master data regularly.

 

2. Supply chain tools

Data should be mapped with supply chain tools to push information out to the appropriate stakeholders. Actions can be proposed in real-time, highlighting any pending risks or decisions that suppliers need to make.

 

3. Cross-functional teams

A risk management plan for your multi-tier supply chain must be communicated through a single source of communication. All teams need to understand the monitoring strategies through a consistent message that goes out to all parties. Don’t take ad-hoc actions that don’t consider the full product lifecycle.

 

Summary

As the digital ecosystem grows exponentially, and consumers continue to demand products at speed, more sophisticated multi-tier supply chains are an inevitability. Companies need to what they can proactively manage the risk associated with such models, retaining credibility, sustainability, and integrity of their products and services. Think of multi-tier visibility as an investment, with a long-term benefit that will see your business prosper through risk mitigation, maintaining reputational integrity and opportunity identification.