Step 1 of the journey is digitalising workflows across the procurement life cycle to enable faster reactions to issues. Step 2 is using data and modelling to enable strategic sourcing to minimise risks in sourcing strategies. Finally, step 3 is to design the entire supply chain to achieve strategic objectives (e.g sustainability) while satisfying the risk trade-offs. Businesses must be aggressively investing in their resilience journey. The winners will be those that started early and collected valuable data first.
This article outlines the five ways that manufacturers can mitigate risks to their supply chain during these uncertain times.
Throw away and start again
The annual risk reports and the old business continuity planning will not work in this new environment. Our existing risk management thinking was built during an era of stability. Those times are over. We live in a VUCA world (Volatility, Uncertainty, Complexity and Ambiguity). The very first step is accepting the old thinking that created these issues will not get rid of them. Without this acceptance, we cannot make any progress. We must change our entire thinking of supply chain risk.
The first step of resiliency is not to change supply chains, it’s to change how to respond to changes in the supply chain. That requires visibility which starts with digitised workflows and recording data properly. Businesses should be using all the following for critical parts of the procurement life cycle; P2P systems, Enterprise Resource Planning, documentation management systems, Transport Management Systems.
Digitised workflows are the foundation of a bigger data strategy. In the medium term, companies should be investing in a unified view of real supply chain data across their operations e.g a control tower. Their long term sourcing strategy must be informed by historical operational data.
Understand points of failure – operational risk
There is the same set of points of failure which create orders being delayed on a day-to-day basis. These are; documentation, supplier communication, external risks, logistics. Businesses should assess their current capabilities to handle these points of failure. Do they have a document management system? Are supplier communications manual and unstructured? Do they have visibility into global external risks (covid, war etc)? Do they have vessel tracking capabilities across every order? Are these capabilities being used by procurement teams?
Manufacturers should develop digital capabilities for these points of failure to ensure they are well equipped.
Incorporate Risk into Sourcing – Strategic Risk
Supplier selection criteria must now include new exogenous risk metrics which have not been used before. These new metrics of supplier selection should now include; exposure to geopolitical instability, exposure to climate catastrophes, governance uncertainty, country monetary stability and labour availability etc.
a) Understanding ALL of the risks your suppliers are exposed to
b) having enough data to accurately configure these risks into a number when scoring them
The same principle should also be applied when deciding on new facility locations.
Every new supplier exponentially increases a business’s risk exposure. More suppliers = more things that can go wrong. A lower number of suppliers makes managing the risk easier. The same happens with every new country a company sources from. Manufacturers who are having the most difficulties are sourcing from both a large number of suppliers and a large number of different countries.
As businesses assess how to reduce complexity they’ll be faced with trade-offs. Decisions to not source from certain countries or increase allocation with one supplier to not source from another will all be more expensive in the short term. That’s because the risk is not factored into costs at this stage. Risks are hidden costs. Data is the only way you can help manage these trade-offs.