Supply chain disruption has long been a concern for risk professionals. The more that companies outsource, especially internationally, the more the risk grows. Until recently, supply chain disruptions usually only affected specific industry sectors or geographic areas. COVID-19 has changed that.
Now, supply disruptions have become a problem across multiple sectors and regions at the same time and it remains unclear when these issues will be satisfactorily resolved. Beyond the pandemic, supply chain issues will likely persist or even be exacerbated due to the impacts of climate change. Companies may increasingly face disruptions like low inventories, shortages, inflationary prices, margin pressure and consumer dissatisfaction. These disruptions may even prove dangerous if they impact distribution of health or safety items.
It is no longer enough to have a plan for when the supply chain fails. Moving forward, companies must implement robust measures to help avoid or reduce the risk of supply chain disruption before it occurs. Some of the mitigation strategies companies can use to help address supply chain disruption include:
Multi-faceted vetting of suppliers and outsourced partners: In selecting a supplier or outsourcing partner, companies examine many criteria. It is important to ensure that all the risks that could lead to a stoppage of output or throughput are covered. Susceptibility to risks related to weather, other natural catastrophes, political unrest, social unrest, epidemic or pandemic, manmade catastrophes, as well as performance and governance track records must all be evaluated and used in decision-making.
Additionally, it is critical to look at who supplies the supplier. Where are they getting the raw materials or finished parts they need? With the exception of service providers, suppliers are rarely without their own supply chains. Due diligence must extend to suppliers’ suppliers.
Academia, consulting firms, professional associations, insurers and brokers have all developed risk evaluation checklists that can be helpful.
Geographic diversification of suppliers: One mitigation tactic is to have suppliers located in different regions. Then, if one part of the world experiences a major issue, materials or services can still flow from the suppliers located elsewhere. It may be worth supporting companies in untapped or lesser-tapped countries to develop their expertise or access their resources so they can become reliable alternatives.
Supplemental suppliers: Whether a company is contracting for raw materials, finished products or services like call centers, using only one or very few suppliers heightens supply chain risk. Using multiple suppliers when a company could use only one can reduce efficiency. On the other hand, working with multiple suppliers can give the company more leverage with each supplier and mitigate the risk if one is unable to deliver. Careful and objective assessment should reveal how many supplemental, or “next level,” suppliers should be used for each type of product or service being sourced.
Vertical integration: Vertical integration is when a company owns and manages its supply chain or large parts of it. Target is often cited as one example of a successful vertically integrated company.
Some of the pitfalls of vertically integrating are that a company can lose focus on its core mission or main products, and that the process can stretch the expertise of the management team beyond its bandwidth. One the other hand, a company can benefit by gaining control over some or all of its supply chain. This can help them try to avoid certain risks and ensure consistent quality across all part of the value chain that the supply chain supports.
In weighing the pros and cons of vertical integration, consider the long-range macro-environment. Are climatic, political, social or other conditions over the next decade expected to favor greater control over the supply chain? There are many sources of information on these topics that can aid in such considerations.
Strategic or purposeful investing: There are many kinds of strategic investing. Companies with significant investment portfolios might choose to buy stock or take a stake in companies that are part of its supply chain. As an investor, the company tends to be better informed of many aspects of the supplier’s operations. If the investment is large enough, it might even give someone from the company a seat on the board of directors. This would afford some degree of influence over how well the supplier ensures its own resilience.
Revised inventory protocols: Over the years, most companies that are dependent on raw or finished materials from their suppliers have instituted “just-in-time” inventory management. This has reduced warehousing expense, minimized waste and improved cash flow. However, when a supply chain disruption occurs, it vastly limits the company’s ability to deliver end products to customers. In addition, “just-in-time” inventory management can also create problems in other situations, such as when a large shipment contains damaged or incorrect goods. Companies need to evaluate if the benefits of such inventory strategies outweigh the risks for their operation.
In tandem with senior management, risk professionals should explore all possible strategies to mitigate the impacts of supply chain disruption. This may include insurance, which will not prevent disruption but can offset some of the associated financial losses. Some strategies will be more suitable than others, some may need to be tweaked to meet specific needs, and multiple methods may be necessary. There are many ways to de-risk supply chain uncertainty—whichever you pursue, the most important thing is to take action before problems arise.