Supply Chain Performance

The Basics of Supply Chain Risk Management

Supply chain risk management, or SCRM, became a popular buzzword in 2020. The COVID-19 pandemic caused extensive supply chain disruption, and organizations around the globe were eager to shore up their operations and minimize their risk exposure. 

While large enterprises often have complex risk management strategies and models, those same strategies are less useful to mid-market manufacturers, distributors, and CPG brands. So if last year caught you off guard (and you’re not alone), there are some steps you can take to protect your organization against the biggest supply chain risks. 

Potential Risks to Supply Chains 

When you think of supply chain risks, what comes to mind? Most people tend to think of big events, like the pandemic or the 2011 tsunami that struck Japan. These events happen rarely, but when they do, they cause massive upheaval. Manufacturers and retailers might struggle to get goods and raw materials on time, causing shortages that end consumers feel deeply. 

These are the ‘black swan’ events that you can’t see coming but should create a business continuity plan for nonetheless. Here are a few of the most commonly discussed: 

  • Natural Disasters 
  • Cybersecurity Threats
  • Public Health Threats
  • Demand Shifts
  • Supply Changes 

Because they are often regarded as the biggest risks to supply chains, most information regarding supply chain risk management focuses solely on such large-scale events. But here at SourceDay, we like to remind folks that there’s an even bigger risk in your supply chain, and it’s threatening your operations 365 days a year. 

The Biggest Risk to Supply Chain Performance

In a recent report by The Hackett Group, SourceDay user data revealed that 52% of PO lines changed on average. This means that after a PO was issued to a supplier, something changed (promised delivery date, quantity, price, etc.) in nearly half of all orders before they were received. 

These changes happen all the time in direct spend and are often considered par for the course by procurement professionals. A supplier might email to say they’re running late and they’d like to send a partial shipment of the order on time, or they might call to tell you that the price has increased and your team has to decide whether the new price is acceptable. 

Discussions and negotiations with suppliers are not often considered a supply chain risk; rather, they’re considered the price of doing business. But think of the consequences. If a part or material arrives late, what does your business stand to lose? If supplier orders are chronically late, what does that mean for your customers? 

What happens if a supplier prints your order out and the job sheet falls behind a desk? 

What happens if one part is late, holding up an order containing dozens (maybe hundreds) of other parts?  

Big events can throw your entire supply chain out of whack, but they’re rare in comparison to the day-to-day disruption caused by order changes. And supplier risk is most often a direct result of outdated processes and a reliance on on-premise technology. 

Why Address Supplier Risk?

What makes supply chain risk tricky to manage is that your business is reliant on third-party suppliers and vendors whose operations you don’t control. If a supplier truly can’t meet your desired shipping date, there’s little you can do in that moment except look for ways to expedite shipping, talk to back-up suppliers, and wait for the first available shipment. But there are long-term actions you can take to help prevent these situations from happening with the same frequency. 

Avoiding such actions means putting your business at risk. Here are the most common pain points that stem from supplier risk: 

  • Unhappy Customers: If you can’t deliver on time to your customers, you put those relationships in jeopardy. Recent research has shown that if orders are late (or even less than perfect) more than 10% of the time, customers will start looking at your competition. 
  • Unrecognized Revenue: When customers are unhappy, that puts future revenue at risk. When you have too much work-in-process inventory that you can’t use up because you’re waiting on other parts, cash flow is constricted and you can’t recognize the revenue from the outstanding order. 
  • Unorganized Operations: We’ve all been there. A supplier calls to say they’re running late, and suddenly it’s an all-hands-on-deck scramble to rearrange orders and minimize equipment downtime. Buyers start calling other suppliers, trying to move orders in or out. Sometimes, it’s an easy fix. Other times, lines go down and teams work overtime later to keep customer commitments. The floor feels like anything but a well-oiled machine.

Risk Mitigation Strategies 

The good news in all of this? Managing day-to-day supplier risk is easier than preparing your business for the next unforeseeable disaster. You should do both, of course, but don’t neglect addressing supplier risk mitigation in favor of crafting a business continuity plan for the next ‘black swan’ event. Here’s how to get started.

Risk Assessment

The first step in any risk management strategy is to perform a risk assessment, or to look for potential weaknesses in your supply chain. If all of your suppliers are located in one geographic region, for example, that poses a risk in the event of a natural disaster or geopolitical event. 

Extend this thinking to your day-to-day operations as well. Do you buy extra of certain parts because you can’t count on the supplier to deliver on time? Do operations hinge on a few key parts from a single supplier? Think about the common interruptions to your operations that send your team scrambling and perform a root cause analysis on them. 

Supplier Scorecards & Performance Metrics

When you begin to dig deeper into the performance of individual suppliers, scorecards will help your team perform a thorough risk assessment that’s grounded in real-world data. A basic supplier scorecard should capture key supply chain performance metrics like responsiveness rates, PO acknowledgement rates, and the all-important on-time delivery rate. These metrics will help you identify which suppliers you can count on, which you need to keep a close eye on, and where your biggest risks lie. 

Supplier Collaboration Technology

Of course, in order for this information to be captured dynamically (and not in a spreadsheet that a team member must keep updated), these metrics must be readily measurable. This means that purchase orders can’t be managed in email and spreadsheet and must, instead, be managed though a transparent, cloud-based solution. If your team still relies on outdated technology or supplier portals that fall short, consider that a risk to be addressed, too. 

Supplier Variation 

As a result of the COVID-19 pandemic, many organizations have begun to rethink single-sourced parts and materials. Think-pieces have been written about reshoring operations to the United States rather than relying on outsourcing abroad as heavily. Others have focused on building a truly global supply chain. 

In the wake of this event, relying on a single supplier is inherently risky, and as globalization continues, building business relationships with new suppliers in different geographical regions is a prudent move. 

Disaster Planning

Last but not least, consider putting some disaster plans into place to ensure supply chain continuity in the event that something like this year’s pandemic or a natural disaster makes sourcing materials challenging. 

By definition, you likely won’t see a disaster coming, but your risk assessment might point out some potential failure points. Analyze potential risk events and put plans in place (for the things you can control) should something happen. Most importantly, make sure all stakeholders know their place in the plan and how to react in case of a disaster. 

As supply chains continue to reel from the effects of COVID-19, many potential risks have been exposed this year—from the day-to-day disruptions to the large-scale breaks in supply. Those organizations looking to gain a competitive advantage and build supply chain resiliency in the wake of this pandemic should look put supply chain risk management strategies in place now. Learn how SourceDay can help avoid supplier risk today.