Supply chain risk is a hot topic for organizations conducting business in today’s unpredictable, global trading environment. Highly publicized catastrophic events like the 2016 Japanese earthquake, which forced Toyota to suspend much of its production at plants across the country, and business crises like the bankruptcy and subsequent liquidation of ocean carrier firm Hanjin Shipping earlier this year, and even the slightest blip on the radar screen can create major headaches for companies that rely on Tier 1, 2, and 3 suppliers to deliver the goods to the right place at the right time in good working order.
With 95% of the world's customers residing outside of the United States, according to the U.S. Chamber of Commerce, the lure of the international marketplace is strong for companies in search of new business opportunities and revenue growth. What many of those firms and their procurement professionals don’t understand is that the global supply chain must be managed in a way that maximizes opportunities while minimizing risk.
And while much of the related responsibility falls on the shoulders of logistics managers, supply chain managers, risk mitigation professionals, and procurement specialists all play important roles in pinpointing, addressing, and warding off potential problems.
Filling Up an Already Full Plate
Carrie Ericson, vice president of procurement and analytic solutions at A.T. Kearney Inc., says that while supply chain risk is an age-old problem for companies, the issue has become even more prominent over the last few years. “Supply chain managers have so much on their plates that risk often falls to the bottom of their ‘to do’ lists,” says Ericson, co-author of the recent A.T. Kearney report, Is Your Luck Running Out? Managing Supply Risk in Uncertain Times.
In the report, A.T. Kearney points out that companies are not effectively managing supply risk and that their risk management approaches have been ad hoc at best since the early 2000s. Nearly half do not have a plan in place to ensure supply continuity, just one-third ensure their supply base complies with policies on environmental sustainability (that needle hasn’t moved much since 2008), and just one-third have a fully prepared response plan for significant shifts in the balance of supply and demand.
“The expectations are so high and comprehensive in terms of what these professionals are expected to do,” says Ericson. As a result, risk often falls by the wayside and becomes a lot like investing in an insurance policy. “You buy home insurance, you pay every month, and every month you look at your bill and say, ‘Gosh. Nothing's happened. Why am I doing this?’” (Of course, if and when something does go wrong, you’re glad that you have that policy in place.)
Ericson says the science behind supply chain risk management is complex, and requires accurate identification of the risk itself—Is it financial? Is it supply chain disruption? Is it brand risk? Cyberterrorism? It also requires the ability to identify and address a wide spectrum of possible issues. A company that has co-located a supply location to gain additional capacity and capabilities, for example, could be unintentionally widening its weather-related supply chain risks. Ericson points to the SARS outbreak that took place in the early 2000s as one example of just how unpredictable supply chain disruption can be.
And as if weather-related events, epidemics, natural disasters, and geopolitical risks weren’t enough to worry about, procurement professionals must also factor in the financial health and longevity of the vendors that they do business with. And it’s not just Tier 1 suppliers that matter; it’s the Tier 2 and Tier 3 vendors that go out of business abruptly and can have major impacts on a company’s supply chain.
Ericson says supplier health should be a top concern for buyers. According to Rapid Ratings’ most recent numbers, the financial health of U.S. public firms peaked three years after the beginning of the global financial crisis in 2008, with an average financial health rating (FHR, which measures a firm’s ability to remain competitive over the next two to three years) of 61.0 in 2011. Since then, the average rating has declined to an average of 59.2, a drop of 3.0 percent.
Over the same period, the financial health of non-U.S. private firms peaked in 2010 at 63.6 and deteriorated by 6.8 percent through 2015. “If that’s any indication of how suppliers are developing their protective mechanisms, like investments in R&D and contingency plans,” says Ericson, “this reduced financial health shows that they’re putting less effort and money into these areas.”
In some cases, Ericson says reducing supply chain risk starts with a simple survey of suppliers’ geographic locations. If too many key vendors are concentrated in a region that’s prone to natural disasters or weather-related events, for example, then it’s probably time to diversify into new areas. Or, at the very least, have a backup plan in place in case of supply disruption.
Using predictive analytics to slice and dice the data can also help buyers more effectively identify and mitigate supply chain risk and disruptions. That’s because it provides a methodology for making more agile purchasing decisions. It also helps procurement professionals look to the future and make accurate predictions instead of always relying on historical information. “If you’re only looking at what happened yesterday, and then using that information to make decisions,” says Ericson, “then you’re going to be the last one at the dance when it comes time to implement a strategy for a contingency or possible event.”
And remember, says Ericson, that for most organizations, it is not a matter of “if” but “when” a supply disruption will occur.