Has the COVID-19 pandemic highlighted the importance of managing supply chain risk?
2nd June 2020
The current COVID-19 crisis has witnessed the gradual shutdown of the world economy piece by piece, and in an interconnected world where supply chains are truly global, the close down of manufacturing has caused some of these chains to break, albeit temporarily.
The coronavirus pandemic has revealed vulnerabilities in global supply chains, and with China being the first to shut down, has highlighted the dangers of “over-reliance” on a single manufacturing hub and the necessity to understand and mitigate the risk of such sourcing decisions.
UK grocers struggled to react to the demand caused by the initial panic buying, however this was not due to supply-side shortages and was more to do with the just-in-time nature of grocery supply chains. Supply-side issues were more widely felt in sectors reliant on Far East manufacturing. For example, if you were lucky enough to get hold of an HP printer with its new ‘instant-ink’ subscription you would have found that with production halted in China, the ink was less instant than expected, as the cartridges were normally produced and shipped on a just-in-time basis.
Going forward, many organisations will be considering their current supply chain strategies and the risks they pose on their ability to deal with similar such events in the future. Before this crisis, clothing retailers in particular were looking at nearshoring, taking the production away from the likes of Bangladesh to improve their speed to market, and it is expected that this trend will continue across other sectors to mitigate risks in the future.
However, is the risk where the product is manufactured or is it not understanding the risk and managing it accordingly? Only if you do have full supply chain visibility can the risks be understood, sourcing strategies developed accordingly, risks mitigated, and the trade–offs made. Achieving true supply chain visibility is not always that easy, especially if buying from a reseller. But to safeguard supply chains in the future and ensure procurement can make an informed trade-off of risks vs cost, organisations need to invest in this capability.
The value of supply chain risk management
In today’s world of global businesses, organisations have Supply Chains with footprints across multiple regions/countries. These Supply Chains are prone to disruptions and vulnerabilities that end up affecting the operations and smooth functioning of the business. Identifying and managing these Risks across the chain is key to making sure the organization is built on a robust and sophisticated foundation. As businesses continue to expand, managing these risks become more complex as they not only include supplier risk but also include risks emerging from market changes, fuel prices, labour costs, geopolitical issues, and most recently; as we’ve witnessed – global pandemics such as the Covid-19.
Key areas of supply chain risk
Supply chain risk management is more than just supplier management. It involves managing end to end risk, by identifying the key areas of risks and the types.
- Known risks – consider risks at various points in the Supply Chain such as Demand and Supply Risks, Manufacturing Risks, that are both controllable and uncontrollable, it is key to have them identified, and have a mitigation strategy in place.
- The unknown – planning for unknown risks such as Economic instability, market risks, labour risks; involves businesses being resilient.
In both these cases, businesses must have a continuity plan to make sure these risks do not have an adverse impact on their financial performances – which is imperative for any Supply Chain Strategy plan.
Effective supply chain management
Our typical risk management projects focus on five ways to manage risks:
1. Improving Visibility/Ownership of Data and Data Insights
Key to forming management strategies for mitigation plans and how it can prevent disruptions in more than one area of the Supply Chain
2. Developing a Sourcing Strategy
A fool proof sourcing strategy that involves supplier collaboration, can overcome sudden change in demand and supply patterns that may have been consequences of either economic instability, natural disasters, or in current scenarios – where the manufacturing units have been shut down
3. Building a strong Business Continuity plan
The pandemic has brought to light the possibility of security breaches and threats that can have a strong impact on the financial performance and may eventually lead to reputational risks. Having a Business Continuity Plan helps organizations respond and recover quickly from these risks
4. Reviewing Risk Governance – Upstream and Downstream integration
Using data and information for visibility/transparency, for the integration of upstream and downstream suppliers. This data can be used to build a robust risk management framework that be scaled up or down depending upon the growth of the organization
5. Implementing SRM
Alignment between supply chain partners and key suppliers helps in gaining visibility of end to end supply chain operations. Where one area of the supply chain may be exposed to a risk, this framework can be used to not only absorb these disruptions but also avoid subsequent disruption in all areas of the supply chain.
Using Systems and Tools to manage Risks
With the growth of supply chains, comes the complexity of managing risks across the breadth of it. Advanced tools for Supply Chain, that enable analysing and interpreting data, pave way for organisations to draw meaningful conclusions for risk planning and mitigation. These tools and systems use a wide range of technologies such as machine learning and artificial intelligence, to make the process of managing supply chain risks more efficient.
In our experience, platforms such as Ariba, for instance, help build Risk modules which can be versatile to suit the needs of an organization, depending upon the level of assessment and monitoring they need. Similarly, using mapping solutions to have a real time supplier relationship, helps assess supplier performances and develop an ideal integration of suppliers. Platforms such as EcoVadis and D&B; that we have worked with, assess Environmental and Financial aspects of businesses. These tools can support organizations in being more proactive and help minimise risk exposure.
So, what does this mean now?
Understanding (using tools) where the organization is positioned when it comes to SC Risk is critical to decide next steps. If the organization is likely to use ad hoc measures/solutions, then steps need to be taken to establish planning for all controllable risks. Transitioning from planning to being a dynamic environment in which risks that cannot be mitigated but businesses can recover from the impact – involves having a proactive, and collaborative Risk Management capabilities to identify risk exposure in all areas of Supply Chain and have a Business Continuity Plan in place.
At 4C, we help clients asses their Supply Chains and build strong Risk Management frameworks, Business continuity Plans, Risk Mitigation plans and provided data driven insights to help develop a sophisticated Supply Chain Strategy