Six Steps for Identifying and Managing Supply Chain Risk
Amidst uncertain conditions, how should businesses approach supply chain risk management? With predictive and resilient supply chain strategies.
These lessons are manifold as recent events have tested supply chain strength. Natural disasters, geopolitical tensions, commodity challenges and the COVID-19 pandemic persist. Border shutdowns and government lockdowns, coupled with systematic health and safety concerns, continue to fray supply chains worldwide.
What is Supply Chain Risk Management?
Supply chain risk management focuses on the strategies that allow us to build supply chain resilience. While "risk management" and "resilience" are often used interchangeably, there is a difference. Resilience is about the elasticity of your supply chain amid issues and the speed of recovery. To successfully protect your company from supply chain disruption, resiliency and adaptability are paramount.
Why is Supply Chain Risk Management Important?
A strong supply chain can only be achieved by proactively managing risk.
The pandemic has underscored that a proactive risk management stance is a requirement, not a suggestion. Jabil's 2020 Special Report: Supply Chain Resilience in a Post-Pandemic World revealed that the pandemic achieved infamous distinction as the biggest supply chain disruptor in the last decade. Nearly eight of 10 respondents cited it as a significant challenge. After all, a medical emergency of this scale touches so many cogs in the supply chain ecosystem that it poses significant disruptions.
Which of the following have had an impact on your company's supply chain in the past 10 years?
What changes are companies making to grapple with the issues caused by the pandemic? Nearly all respondents of the Jabil-sponsored survey said they are investing in supply chain technology or services.
Communicating a stream of real-time data into actionable insight brings light to each node; this intelligent digital supply chain (IDSC) paints a clear picture throughout the entire product life cycle. Leaders can examine each link of the supply chain for signs of wear, pandemic or not.
Supply Chain visibility is imperative to maintain strength. Most companies rely on a complicated network of suppliers; with so many points of contact to track, total visibility throughout the entire supply chain is difficult. It is also essential. Even a disruption of 30 days or fewer can put 3-5% of earnings before interest, taxes, depreciation and amortization (EBITDA) margin at stake. The company that exclusively works with single-source suppliers and/or transportation is likely to face more pronounced problems—and to have difficulty fixing them once they arise.
The forecast for risk is never completely predictable, but this tenet is: identifying and managing risks in an interconnected world loom in importance on the global radar.
Your teams should expect and prepare for potential supply chain disruptions, and they can do so through physical and digital connectivity. A supply chain is only as strong as its weakest link. When data is actionable, people and machines work together to leverage information and subsequently optimize fulfillment strategies.
Six Steps for Identifying and Managing Global Supply Chain Risk
For decades, cost efficiency and strong commercial outcomes were the focuses in strengthening supply chains. With new risks come new mitigation strategies.
Supply chain managers should take a multi-pronged approach to manage these new stressors; looking at historical data to plan for future roadblocks is not enough. A systematic plan that accounts both for potential roadblocks as well as the needs and capabilities of each unique business is the surest path to supply chain strength.
Start by considering how to balance operational costs in normal conditions versus costs under severe constraints. A framework for your supply chain risk mitigation strategy may resemble this one:
- Step 1: Understand the Risk Threshold
- Step 2: Define Boundary Conditions
- Step 3: Identify Critical Partners
- Step 4: Manage Trade-Offs
- Step 5: Agree on Funding Model
- Step 6: Begin Project
1. Identifying the Threshold of Supply Chain Risks
COVID-19 is the most severe pandemic many existing businesses have weathered, and it has brought with it many elements for predictive modelers to consider. Business leaders who take an uber-close look at company operations and systems stand ready to meet supply chain challenges head-on because they have identified their known risk threshold. Some maintain more of an appetite for risk than others, but this bullish attitude wilts when a pandemic or similar disruption event strikes, recoiling an already-complex global supply chain.
Identifying risk threshold requires "if and will" introspection:
- If a pandemic lingers, will we be able to source each part?
- If a natural disaster hits, will we be able to deliver products quickly and efficiently?
- If a warehouse is destroyed, will we have another location that can seamlessly continue manufacturing protocols?
Mitigation contingency plans should begin with the most likely scenario as well as the one with the largest potential impact, according to an Inbound Logistics article. To determine a company's risk threshold, the impact on the cost of product qualification or re-qualification for new components, new supply chains, reliability and supply management requirements should be examined. Multi-sourcing components to help manage supply chain flexibility should be considered to avoid supply disruption. This holds true even in highly regulated industries, like automotive or healthcare, which are usually risk-averse because the qualification for products can be stringent.
The forecast includes inevitable stressors, so it stands to reason that there would exist some streamlined best practices regarding supply chain risk management per industry. However, there is significant variability in the maturity of predictive supply chain risk management initiatives. Perhaps that is why 52% of supply chain decision-makers say their company is investing in risk management services or technologies, according to the Jabil survey.
Developing best practices for predictive supply chain management demands time and planning. A company reacting in real-time to problems will put out fires as they arise instead of following established protocols. When the metaphorical fires do ignite, knowing the threshold for risk across the supply chain can be the difference between tossing water buckets in a general direction and knowing exactly where and how to douse the flames.
2. Define Boundary Conditions
Opportunities are endless, but that isn't necessarily a good thing in supply chain management.
While 'post-COVID' wisdom may point towards building smaller connected facilities in order to weather any disruptions, it is not always possible or advisable.
The advantages of comprehensive optimized mega-factories go beyond cost, and they cannot be simply brushed aside.
Supply Chain managers must ask: what is feasible and what is not?
According to an article by McKinsey, the average automotive manufacturer has approximately 250 tier-one suppliers, but that number grows to 18,000 across the full value chain.
Aerospace manufacturers have an average of 200 tier-one suppliers and 12,000 across all tiers. Technology companies list an average of 125 suppliers in their tier-one group and more than 7,000 across all tiers.
When and where is it possible to diversify—and when is it not? This is the main idea of defining boundary conditions. Look to China's proliferation in the electronic components realm as an example.
If China were to be locked down and could no longer ship any components, would a supply chain that relies on those components be able to continue operating? Companies that define their boundary conditions and identify exactly what they are trying to resolve under those set of conditions will be able to build a cohesive plan when those conditions arise.
3. Identify Critical Partners: Supplier Assurance
Who will pick up the slack when catastrophe strikes? Now is the time to identify and involve all key areas of the entire product ecosystem, including regional supply chain partners. Contingencies can be put into place by examining the logistics portion of a supply chain risk management plan, which may involve moving product manufacturing capabilities and transportation outlets.
This stage demands designing for flexibility and portability. The warning should sound for companies that sole-source custom components or single-source custom processes.
Deliberate plans should include testing, qualification of multiple sources and designing to allow for multiple footprints, so that components can be swapped if required. Receiving the assurance from critical suppliers that these identified processes are viable is key.
A close look at sole-sourced or single-sourced parts that are non-negotiable in their customization requires a strategy to maintain supply security. You can't count on supplier assurance after a disruptive event occurs. This element must be baked into your end-to-end strategy-from design to delivery-to ensure you are leveraging planning models to optimize inventory.
Designing with high levels of resiliency thanks to cemented supplier relationships results in a supply chain that is elastic to external shocks. Strategy will be different for each company, but examining different supplier relationships globally, regionally and locally helps to balance the risk of local disruption. The extent of these relationships stems back to the previously identified supplier risk threshold.
4. Trade-Offs Management
Companies make rational decisions regarding where to place business locations. Once operations are in that area, millions of dollars may be necessary for specialized equipment designed to operate efficiently. Your people factor in the equation as well as sub-tier suppliers that can support the entire product ecosystem. Imagine the need to separate those processes, to take decades of investment and endeavor to move it elsewhere. You will need to face trade-offs and a risk assessment.
This is not an easy process that happens overnight. At a minimum, it takes several years to identify what a company is willing to trade off while still maintaining product quality. This step is much easier when boundary conditions and risk threshold are already identified.
5. Agree on Funding Model
Any change from status quo can be expensive and difficult.
After identifying critical partners and processes, agreement upon the financial flow per situation should be obtained and mapped. Should contingency plans activate, the chosen risk management continuum will be put seamlessly into action. Agreement on a funding level should outline credit terms and payments schedules; consignment and title ownership arrangements should be settled.
Having done all the work to identify alternative suppliers and systems comes to naught if a company cannot agree on how to compensate them. Maintain agreement up-front to avoid delays or any unexpected surprises.
6. Ready to Start Project
By adhering to the strategies to mitigate supply chain risk, a company maps out a plan similar to the "Choose Your Own Adventure" books: if X occurs, turn to page 24; if Y unleashes another global medical emergency, turn to page 43. The plans will be there, ready to be put into action, the supply chain affected as little as possible.
Factory of the Future and Supply Chain Risk Management
When a crisis does occur, companies need to jump into action to repair broken links in the supply chain, arrange alternative transportation methods or take the critical steps needed to keep production on-track. Building a digital ecosystem is the ultimate level of maturity model we should all aim to achieve.
At the "digital ecosystem" level, a company has connected value chains for all of its suppliers and customers. Unified platforms and solutions will help manage all of these connections, including supplier qualification, product quality control, alongside shipment and delivery details for every part or product. This integration threshold offers the most seamless model for an outstanding risk management effort (and the greatest customer experience).
The factory of the future plays an irrefutable role in this digital ecosystem—it's also the one enabler currently missing from the true transformation of the supply chain industry. In order to effectively manage the supply chain and be truly responsive, there has to be a way to aggregate all the factory-level information.
Through these efforts, we can better understand where we are in the manufacturing process, especially for critical products. This ability will allow us to anticipate and create effective strategies, better manage suppliers to create significant competitive advantage and better mitigate risk.
As we begin to adjust to the new normal post-pandemic, it is important for us to remember that not all supply chains are created equal. Enterprise requirements are different in every industry, leading to unique supply chain processes and standards. But it is still critical that our solutions aim to create the right level of flexibility at the lowest possible costs when managing risk.
We have always been talking about supply chain risk. The biggest takeaway from the disruptions of COVID-19 should be that it is time to proactively manage supply chain risk moving forward. The assumptions of a gold standard supply chain from a pre-COVID world will shift to focus on supply chain risk management. These discussions signal from the ground that there is a willingness to evolve—resilience is key to business continuity.
How do you define a robust supply chain? What does resiliency mean to you?
Special Report: Supply Chain Resilience in a Post-Pandemic World
Insights from over 700 supply chain decision-makers at OEMs with more than $500 million in revenue on how they are managing their supply chains in light of COVID-19 and other market dynamics.