Minimize Risk in the Supply Chain: An Urgent Call to Business Leaders
How has COVID-19 affected supply chains?
Supply chains have taken center stage today in the business world. In fact, the inflationary environment we are in is being blamed on supply shortages. The Consumer Price Index rose 7% from December 2020 to December 2021, the largest 12-month increase since the period ending June 1982. COVID-19 acted as a catalyst and accelerated supply chain woes, but the root cause of these supply chain challenges have been in the making for several years. Supply chain executives are facing the brunt of these challenges today and face supply-demand imbalances more than ever before.
The “quadfecta” of cost, service, resiliency, and sustainability
Supply chain executives must evolve from cost and service as the key objectives for optimal demand-supply balancing towards the “quadfecta” of cost, service, resiliency, and sustainability. Management practices such as lean manufacturing and just-in-time inventory management, along with globalization, have made tremendous impact on cost and service but accentuated risk. Risk events that happen in one part of the supply chain can cause a disruptive effect that is amplified multifold given the complex connectivity of labor, raw materials, and capacity. The bullwhip effect is one example of this disruptive effect, when small changes in demand cause huge demand spikes downstream.
Operational vs. disruptive risks
One of the keys to becoming more resilient is to minimize risks in your supply chain, while another is having the agility to quickly respond to disruptions caused by these risks. A good way to think about risk is anything that causes a supply chain to be impacted in terms of its performance. Risks can be further divided into internal risks or third-party risks. Each of these types of risks can be further subdivided into operational and disruptive risks. Table 1 describes a few examples of these types of risks.
Table 1. Categorization of risks
|Types of risks based on where within the supply chain these risks occur||Impact of risks||Example|
|Internal Risks||Operational||Minor quality defect in internal manufacturing process that was caught during inspection|
|Internal Risks||Disruptive||Major quality defect that was unaddressed and caused consumer health issues (pharmaceutical recalls)|
|External Risks||Operational||Third-party supplier not shipping on time|
|External Risks||Disruptive||Supplier’s supplier going out of business due to lack of business compliance (for instance, the German Supply Chain Act is an example of regulatory compliance that suppliers have to adhere to)|
Operational risks are mainly driven by variability and uncertainty. Balancing supply and demand by orchestrating the flow of materials and information is a key requirement for managing operational risks. Metrics such as lead-times, forecast accuracy, inventory levels, and service are used to measure operational risks. Design and planning software has been utilized for the last several decades to manage these operational risks. Lean manufacturing also focused on managing these operational risks, especially within the four walls of the enterprise.
Disruptive risks on the other hand are harder to predict and manage. These risks are low probability and high impact. Examples of disruptive risks are suppliers going out of business or shipwrecks that result in the loss of cargo containers. Natural risks such as weather, fires, pandemics, etc., fall under this category as well.
Inherently supply chains are designed to withstand a reasonable amount of shocks caused by operational risks. There have been other pandemics in the past such as the swine flu and the avian flu, and supply chains did not fall apart during those time periods. What was different this time around with the COVID-19 pandemic is the catastrophic scale at which the pandemic spread and the worldwide impact it had. This exposed the points of failures within supply chains that have stayed hidden for many years.
One key point of failure for supply chains is how most of them have been designed with a heavy focus on cost and service. Risk management has been thought of as an afterthought and oftentimes it's only the CFO or the CPO who worries about these risks, especially dealing with supplier’s financial wherewithal. This approach needs to change. Supply chain designers must consider risk as one of their prime objectives, and de-risking the supply chain has to become a C-suite level strategic imperative. Supply chain executives must partner with the office of the CFO and CPO and put together a framework for managing these supply chain risks within their organizations.
Using technology to de-risk supply chains
From a technology perspective, supply chain design tools have been developed from the ground up to handle uncertainty and risks, generate scenarios that identify risks proactively, and provide solutions to mitigate these risks. It is critical that your supply chain design tools model real world complexity to effectively model the risks. Lack of adequate risk data and the non-strategic positioning of supply chain design within the organization has been a key inhibitor to success. Another part of the solution that has been missing until recently is the tight integration with upstream processes, such as strategic sourcing and supplier risk management, which have been siloed and operating in their own domains.
With Coupa’s Business Spend Management supply chain solution, there is a great opportunity for companies to identify their supply chain risks from the ground up and design supply chains to manage them. Below is a typical business process workflow that demonstrates how a risk was identified with the result being another supplier was sourced to manage the risk.
Table 2 : Example business process for identifying and mitigating risks
|Model the multi-tier supply chain||Ensure that the supply chain model has all the tiers of the supply chain across customers, suppliers, transportation providers, etc. Ensure that the supply chain model has optionality built in (for example, alternate suppliers even if products are single sourced currently).|
|Model the risks||Ensure that the model has the risks and their corresponding playbooks built in. For instance, what is the resolution when a major recall happens?|
|Identify risks||Identify the types of inherent risks that are present versus residual risks (which are lower and manageable). For a supply chain that requires cobalt as a raw material (for instance, EVs), the inherent risk is high because it's mined in places with high risk of modern slavery. Companies must make sure that their suppliers have the right controls in place to ensure that this isn't happening in their supply chains. With these controls in place, the inherent risk is mitigated and a lower level of residual risk remains (which may be acceptable).|
|Identify criticality of risk and quantify impact||Supply chain design simulations identify that the node through which the supplier flows materials is in fact a critical one and contributes to 50% of revenue. Clearly this risk is critical and has to be managed immediately.|
|Engagement with suppliers||The brand-owner is notified of the risk and engages with the supplier to validate the risk and discuss remediation steps.|
|Identify alternate suppliers||A sourcing event is triggered within strategic sourcing to identify possible suppliers within the community to source the products that are needed. Candidate suppliers along with capacity and lead-time information is identified and shared with the design team.|
|Model alternate suppliers and perform impact analysis||Since the supply chain model has already been designed for optionality, it is a question of loading the new suppliers' data to simulate the new supply chain structure and flows.|
|De-risking playbook implemented||A combination of remediation through supplier relationship management capabilities, alternate sourcing with additional suppliers, and restructuring of the supply chain to accommodate the new flows is put in place.|
How Coupa can help
To safeguard against disruptions, resiliency is a clear requirement. Traditional internal facing approaches of designing and planning fall short due to lack of proactive visibility into risks and inadequate data. Companies require a combination of continuous design to ensure that risks are quantified on an ongoing basis, supplier risk management to identify risks within the extended supply chain, and strategic sourcing to ensure that optionality is engineered structurally within the supplier network. Proactive risk mitigation begins at the very foundation of your global supply chain network: its design.