From the August 2021 print edition
Recent global events like the COVID-19 pandemic, the Suez Canal blockage and unexpectedly cold February weather in Texas have shone a spotlight not only on the need for resilience in supply chains but also the importance of risk management. With global business again ramping up in many regions, supply chain leaders must look to build that resilience while scanning the horizon for potential risk.
“When we’re looking at risk within the supply chain, first we’re looking at our products that are raw materials and if there are constraints,” says Maria Greaves-Cacevski, senior category sourcing lead at Chemtrade Logistics Inc. “Secondly, we’re looking at our service. How can we do things faster and more efficiently?
This usually means optimizing technologies. Either inputting a new system, such as a procure-to-pay, P2P, or looking to optimize our internal system – creating more KPIs or reports or metrics across the system.”
When dealing with goods, the risks are not just within your supply chain with regards
to resources, people and access, she says.
It therefore pays to scrutinize your suppliers’ suppliers for potential risks. Partnering with
a supplier can now mean partnering with their network of suppliers, distributers and manufacturers as well.
If you’re looking to use a raw material and that material’s supplier is constrained, that can in turn constrain your system.
At the same time, the pandemic has impacted the service supply chain due to social distancing and constraints on direct contact among people, Greaves-Cacevski notes. Adapting to that reality is necessary for long-term success.
Many companies are now performing supplier risk assessments to determine who their key suppliers’ suppliers and are determining if they’re single or dual sourced.
Some firms are using technology to deal with constraints to the procurement of services. For example, a procure-to-pay software system can help to reduce costs by reducing non-value-added tasks.
“A lot of the administration, a lot of the additional tasks are being taken over by efficiencies, by technology,” she says. “‘Can we use a catalogue to order our common materials? Can we have repeat purchases that are systematically, or at least set up, so we just have to order on a monthly basis?’
Trying to reduce human error is another non-value-added task within the supply chain.
“Risk mitigation is a two-pronged approach. It’s us trying to figure out what we can do inside as well as working with our partners outside.”
Many companies are working to consolidate their supplier base, says Greaves-Cacevski. An organization with 250 suppliers may narrow that to 60 to mitigate risk, while trying to make those relationships more like partnerships. Still, single-source partnerships aren’t necessarily better than a diversified network. Group purchasing organizations or consortiums can help to offset that risk.
“There are four different types of responses for risk – you can share it; you can mitigate it; you can transfer it or you can accept it,” she says. “Right now, a lot of the strategies are going to risk sharing with the supply base – especially if commodities are single sourced or there’s a very small network. We really want to try to have that sharing of the risk between the two parties versus us accepting all of the risk or us putting all the control into our suppliers and we not having the visibility.”
Large organizations can use technology, like a risk management system, to deal with potential exposure in the supply chain, Greaves-Cacevski says. Companies that can’t afford such systems can use procurement fundamentals, like putting risk into contracts.
For example, make terms and conditions more robust by preventing spot buys, or avoid paying market price if commodity prices rise.
Risks facing supply chains can be divided between near-term risks and systemic ones, says Madhav Durbha, vice-president, supply chain strategy, at Coupa, a software company. In the near term, challenges include volatile demand patterns; uncertainty surrounding the Delta variant of COVID-19; transportation constraints like congestion at logistics ports; and misaligned inventories resulting in write offs, Durbha says. Systemic challenges include single-source risks; regulatory issues; and brand risks associated with environmental, social and corporate governance.
The pandemic has resulted in a rise in scenario planning and simulation, Durbha notes. Forecasts have become less reliable due to demand volatility, leading organizations to pressure test their supply chains through forecasting. Meanwhile, advances in AI, machine learning and natural language processing also allow for better predictive power.
“Building a supply chain digital twin with the representation of the extended supply chain, including supplier and customer locations, is a reality now,” Durbha says. “New generation platforms allow for processing anonymized community data that can be leveraged to spot risks. Advances in cloud computing and multi-tenant SaaS platforms allow for this. Technology has definitely made the risk prediction process easier.”
A new perspective
For organizations that have risk management plans, the impact of COVID-19 has changed the way they view those plans, says Jon Trask, CEO and found of Dimitra Ag Tech. The pandemic has changed the status quo, Trask says. Previously, most risks were manageable. Even with something like the Suez Canal blockage, organizations would have managed to ship their products by air or find an alternative transport method. The automotive industry, among others, has been adept at diversifying its supply base to deal with such risks.
At the same time, supply chains have become globalized over the years, with many reducing the amount they buy domestically, Trask says. The pandemic amplified the shortcomings of that trend, making it harder for companies to restock the shelves in their warehouses or retail stores. To offset that, many organizations are regionalizing their supply chains and changing the mix of their supply bases.
“Their risk management plans said, ‘let’s have a supplier in China and a supplier in Korea or India. If one fails the other one is going to support us,’” Trask says. “Now they’re saying, ‘the pandemic prevented China and India from shipping anything to us. We need to go back and start supplementing North American-based or regional based suppliers.’”
Previously, risk management models would assume a drop in supply to 95 per cent, then 85 per cent, then perhaps 75 per cent to discover where the system might break, Trask says. Models didn’t look at a failure rate of 100 per cent. But the pandemic has caused organizations that were reluctant to hold inventory to become far less averse to the idea.
This has changed the demand on technology, he notes. Commodity based supply chains like agriculture benefit from including factors like weather in risk forecasting. They may also look to technology to keep abreast of developments in the greater market, as well as creating financial models in the event of unexpected storms and their effects on prices and costs.
Tying those sorts of factors together through technology requires the ability to analyse
a lot of data and access multiple data points, Trask says. Customizing that information can be tricky. The complexity has increased the demand for machine learning capabilities.
To get a handle on risk management and forecasting, Trask advises discussing the topic with a consulting company or audit firm.
Such companies have done the research and are redesigning their risk models based on current conditions, he notes. Next, look at the case for using technology to mitigate risks.
A place to start is to consult your ERP company. From there, look at what smaller applications may be available in your company’s niche. Finally, organizations must determine which steps to take, whether that involves investing internally in risk management and planning teams, deciding to hold more inventory or something else.
Finally, think of risk management as a team sport, Trask advises. There needs to be someone who will build the plan based on consultations with the key players.
“I see risk management happen in some companies in silos,” Trask says. “If the finance group doesn’t understand the complexity of the supply chain, or you’re only looking at your immediate suppliers and not their suppliers, it’s not a team sport. When you’re managing risk, you bring your suppliers into it, because their risks have to go into that equation. So, broaden the spectrum.”
The risk landscape
Marc Gilbert, managing director and senior partner at Boston Consulting Group (BCG), based in Montreal, highlights seven supply chain risks the organization watches. These include cybersecurity, for example the shutdown in May of the Colonial Pipeline in the US. Geopolitics and global trade represent another risk, which includes terrorism, intellectual property issues, new trade agreements and others.
Sourcing concentration is a third risk, Gilbert notes. For example, billions of dollars in wheels, automotive bodies and breaks come from Hubei, the Chinese province in which COVID-19 was first discovered. Logistics holdups such as the Suez Canal blockage represent another risk, as does inflation, although BCG’s view is that inflation will pass. Climate change is a risk of rising importance among supply chain leaders; finally, a labour shortage – particularly on the shop floor – is a risk accentuated by the pandemic.
Companies have refined supply chains that emphasize low costs and high efficiency, Gilbert says. This has led to brittleness within those supply chains. The pandemic has highlighted the importance of building resilience. The C-suite is turning to supply chain practitioners to help build that resilience and buffer in some costs to manage risk.
“If anything, COVID-19 has accelerated the emergence of the crack in the armour of a highly brittle chain,” Gilbert says. “It’s made it incredibly evident that one needs to move the index now to manage for risk and resilience a little bit more than purely for efficiency and getting every nickel out of your supply chain.”
Predicting risk is very difficult, Gilbert adds. But to manage risk, organizations can set up milestones that signal when certain risks are moving up in probability, then adjust accordingly. From there, planning divides into the two buckets of absorbing the risk and risk recovery. The absorb stage involves the ability to withstand a shock, such as a tsunami that takes out a port or manufacturing facility. The ability to absorb a shock involves a structural approach, Gilbert says, including increasing inventory, boosting the number of supply sources, bringing manufacturing in-house or adopting flexible contracts.
The recovery stage involves the ability to adapt quickly following a shock. To do so, end-to-end data visibility through tools like advanced analytics is key, Gilbert says.
“The absorb side is structural and usually requires quite a bit of capital. The recover and adapting side is far more about advanced analytics, data, digital, visibility, linking with your supplier and their suppliers and your customer,” he says. “And when you bring all that data together you can do some amazing things because you can predict, and you can sense rapidly and adjust which moves you want to make.”
The pandemic highlights how vulnerable supply chains have become. And while predicting risk may be difficult, working to mitigate it can help to create the resilience that modern supply chains need. SP