With supply chain challenges making headlines in the mainstream media, our industry has an unusual opportunity to rethink how to manage risk throughout our dispersed global network of suppliers and distributors. The last 18 months have revealed a pressing need to develop better supply chain resilience. While risk management solutions have centered around visibility in the past, it’s clear now that we need to shift our focus to collaboration and relationship building throughout the supply chain.
One of the biggest challenges companies face when making changes to any supply chain is bringing together the various internal constituents involved in the process.
Consider bringing on a new supplier. The time tested approach to this process is to embed risk management processes into supplier management. Often owned by procurement or supplier development teams, these groups will create visibility throughout various stages of the process from identification, to evaluation, selection, qualification and onboarding. While visibility throughout the process remains a central element in risk management, creating resilience is about ensuring stakeholders’ involvement.
When bringing on a new supplier, a company will have to work with multiple departments, including product design, logistics, regulatory compliance and so on. It becomes extremely complicated. Companies often struggle to achieve a mature supply chain with robust risk management strategies due to fragmentation among business functions that have competing interests and poor communication. Anything we can do to bring these stakeholders together pays dividends in the end.
Many companies also boast about their war rooms and crisis response teams that kept everything running during the pandemic. But if you look at why that fundamentally worked, it’s because they broke down the silos in a crisis. To make that happen, they all had to believe in a common truth. There had to be a willingness to work together. Without that, you can’t foster a collaborative response with your external partners.
What we are learning in this post-COVID environment is that you need to create a culture of collaborative response. This requires you to first establish what risks you face as an organization and how you propose to manage and mitigate them. It’s important to create a central repository for data and knowledge about risk. You need to have your house in order before you can take the next step. Otherwise, you’re just going to be reactive. Then you’re ready to ask: What can we do with our supply network?
Take the example of lean inventory levels. Many companies have a line item in the budget for emergency air freight, to be used in the event of ocean or rail freight disruptions that could cause stockouts. At first glance, this appears to be the necessary cost of keeping inventories low, but in many cases, the cost and frequency of these emergencies have risen over the years, making them harder to justify. While making cost-based decisions like allocating an emergency budget can pay a quick dividend, it fails to take into account the total cost of that choice over time.
Companies that take this reactive approach to solving the disruption may be better off diverting some of this money to fund and invest in more collaborative relationships with their suppliers, that avoid or even eliminate certain emergency costs altogether. A collaborative risk management approach better prepares companies to respond to problems when they occur rather than take a defensive posture of managing supply chain challenges on their own.
To move from a reactive to proactive approach, companies need to carefully manage their external relationships. Some of the costliest risks lie outside the four walls of your enterprise, in the hands of the partners you do business with.
Consider some of the more popular ways to solve our current global supply chain crisis: reducing product complexity, reducing strategic inventory levels, improving supply forecasting or finding new sources of supply, especially those closer to home. All of these approaches can mitigate risk. But with the exception of reducing product complexity, all of them are about external partners. To achieve better, more predictable outcomes, we therefore need to think about our relationships with suppliers and how we might work better with them.
A forward-thinking collaborative risk management strategy will ask: How can we get closer to our strategic suppliers? How can we get more cooperative? How can we find ways to jointly solve for risks that arise in our shared supply paths? In my opinion, the answers to those questions involve stepping away from the traditional, top-down approach where the buyer is king. The supply chain of the future will have a flatter hierarchy, and will value communication and digital solutions. Thus peer-to-peer collaboration needs to become an integral part of how we work.
One way to do that is to share whatever visibility you have of your supply chain with your suppliers, and to ask them to do the same. We find that when suppliers share information with their customers and vice versa, they immediately begin to improve their own risk posture. They get the big-picture view, and can see where they fit in and where the risks lie. They feel vested in a common interest to solve potential supply chain bottlenecks and risks. This makes it far easier to plan intelligently. Gaining supply chain visibility, including sub-tier visibility, is great; sharing that visibility with suppliers makes them feel even more empowered as not just suppliers but business partners.
The next step is to let suppliers know that you expect a certain level of risk-management capability from them, and that you’re going to measure and assess that on a continuous basis. If your supplier is willing to make the investment to improve their risk strategies, you’ll see them as a more reliable partner, and potentially do more business with them or incentivize them in other ways, such as offering better payment terms or a stronger strategic relationship that may improve their credit rating.
It’s time to acknowledge that the prevailing attitude in supply chain management over the last 20 years has evolved. As supply chains got longer, the just-in-time, lean-and-mean approach made less and less sense. Pre-pandemic, there was speculation about which straw, exactly, was going to break the camel’s back — whether unsupportable business debt, trade sanctions or other shifts in the competitive landscape. We have to come to grips with the fact that this old thinking leaves supply chains avoidably vulnerable. The last year and a half blew all of that away. What was revealed underneath is that decisions were too predominantly governed by myopic cost considerations alone and now need to rely on the ability to digitally transform our supply chains internally and with our business partners to both innovate and solve for common risks.
Of course, we’ll still need to consider cost as we look toward new solutions. But we must do a better job of taking the wider supply chain environment into account, and do more to recognize the long-term costs of the decisions we make and the relationships we foster.
Bill DeMartino is chief product officer and managing director, Americas, at riskmethods.
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