Traditionally, supply chain management has focused on procurement—finding the right suppliers and ensuring efficient flow of materials through the value chain. But with the ongoing pandemic, in addition to rising geopolitical conflicts, sustainability concerns, and even adverse weather events, the risk calculus has changed.
These shocks to the system underlined just how vulnerable our supply chains are to disruption. With so many new and heightened risks to consider, it can be difficult to know where to focus your efforts. Seb Butt, Craft’s Global Head of Business Development, recently sat down with SupplyChain Talk to discuss the new normal for supply chain management, and what leaders can do to identify, predict and mitigate risk.
Supply chain managers have always been risk averse, but in today’s chaotic climate, there are even more risks to consider and more variables to analyze, explains John Guerin, Senior Manager of Strategic Sourcing and Procurement at SPX Corporation.
“Before, you could rely on conventional and predictable risk information—now the supply chain risk profile is many times greater, and the opportunities for supply chain disruption are higher than ever,” says Guerin.
Within this new risk context, supply chain managers need to be strategic in how they measure, predict, and prepare for risk and disruption. One of the ways that Guerin’s team approaches this is by diversifying their suppliers as a buffer to potential disruption in one or more suppliers. This includes reviewing the organization’s commodities to identify areas of risk (e.g., single-source suppliers) and then working with those suppliers to create a diversification plan.
However, at the same time, too much diversification can be its own risk. By splitting your sources between multiple suppliers, you may not be the primary customer for a supplier, and, therefore, they will be less likely to prioritize you when there is a disruption. In other words, instead of being a big fish for one supplier, you become a small fish for two or more suppliers, leaving you with less leverage when things hit the fan.
As a result, mitigating risk has become a more delicate balance. To be successful, you need not just experience in the field but also good data to work from, according to Guerin.
Today’s risk landscape is expanding and increasingly complex. Not only do companies have to grapple with the ongoing effects of the pandemic, but also the intersection of other threats like cyber risk, geopolitical conflict, regulatory risk (such as new ESG and sustainability laws), and more.
To really grasp your own risk landscape, you need to take a holistic approach to data, Butt explains. And there are a host of new data providers offering insights on the plethora of these new risk categories. It’s no longer enough to rely on subjective supplier surveys. Real-time, comprehensive supplier data is essential for uncovering potential risks, identifying emerging problems, and preventing larger disruptions.
Reviewing supplier data and analyzing risks like this can give companies a more complete picture of their current vulnerabilities as well as opportunities. It also helps improve supplier relationships, as you can share key information upstream and downstream with suppliers to reduce the threat of disruption and build trust.
When disaster strikes, you quickly discover what is working well and what isn’t. But waiting for disaster to take action isn’t a viable mitigation plan. Stephen Kravec, Director of Supply Chain and Customer Service at Fresenius Kabi Canada, emphasizes the importance of preparation over “prediction.”
His supply chain team at Fresenius conducts risk assessments on everything to get a comprehensive picture of their risks (and resiliency). This includes a failure mode effect analysis that evaluates and prioritizes risks, putting in line everything that could go wrong, and identifying where to focus mitigation efforts.
“You can’t predict disaster,” Kravec says, “You’ll drive yourself crazy if you try to predict the next big disaster, but you can try to be ready for multiple scenarios.”
Another lesson from the pandemic taught Kravec that when disaster strikes, there’s no such thing as a “small” supplier. “You realize, every supplier is a key supplier,” he says. He recalls one supply chain issue they had early on in the pandemic when they ran out of labels. It’s such a small thing, but when the supply chain was disrupted, the business had to scramble to source a new supplier to fill the gaps.
Similar supply chain gaps were discovered across industries for things companies never would have expected. Butt shares one example of a casino company that found itself struggling to source locks for their buildings during the pandemic for the first time. Normally open 24/7, the casinos never had a need to lock down their doors. But when the pandemic caused worldwide shutdowns, the businesses needed to find a supplier that could provide and install the right locks.
“That’s why understanding your entire supply chain—as much as you can—has never been more important,” says Butt.
Another critical component of risk management in today’s world is nurturing strong supplier relationships and having open communication on performance.
“If you don’t communicate with a supplier and they don’t know how they’re performing in your eyes, they won’t do anything differently [to improve],” explains Guerin.
To support strong supplier relationships, Guerin’s team implemented a supplier performance management program. They also prioritized open communication with suppliers, particularly about where they needed help.
For example, in order to mitigate disruption, the company had to make some costly adjustments—but they couldn’t afford to pass on those costs to their customers. This required both open and trusted communication with suppliers to negotiate and ensure reliable supply while mitigating costs.
So, is it better to invest in avoidance, mitigation, or recovery?
“You have to mitigate risk to be resilient,” asserts Kravec.
This means all three tenets should be a major part of your strategy, agrees Butt. While predicting disruption is, of course, always ideal, it’s not realistic. You have to be able to recover as well and prioritize lead time to recovery.
And doing that all comes down to good data.
“Having a strategy that allows you to respond fast and using data to be able to make strategic decisions is all predicated on having that ongoing data,” shares Butt. “That’s the only way you’re going to be able to remediate and recover fast enough so that business objectives and priorities are not massively affected.”
Comprehensive, real-time data that uncovers n-tier supplier information is critical to not only identifying risks but building better supplier relationships for a more resilient supplier ecosystem going forward. Companies that prioritize collaborative supplier relationships built on trust and transparency will be better equipped to prevent, mitigate, and recover from disruption long term.