Marisa Brown, Senior Principal Research Lead, Supply Chain Management at APQC (American Productivity & Quality Center) recently gave a presentation at ARC Advisory Group’s Supply Chain Forum. In her presentation, Ms. Brown examined supplier risk during a crisis, supply chain disruption, supply chain risk, and how organizations can shift from surviving to thriving. The following article highlights some of the key points made by Ms. Brown. For a more comprehensive explanation of best practices in supplier risk management you can view the full video of the presentation here.
Because of the pandemic, risk management surrounding sourcing has become top of mind in supply chain organizations. APQC has conducted benchmarking and best practices research on supplier risk management. APQC is a nonprofit organization focused on benchmarking, best practices, performance improvement, and knowledge management. What makes the APQC data so valuable is the large pool of respondents and the rigorous process they go through to validate their data. For this research alone, there were over 600 valid respondents.
The survey-based research gathers quantitative data as well as information on best practices or performance drivers. All data has undergone statistical and logical validation. The perspectives in this research on supplier risk are drawn from the over 600 respondents across various industries. It highlights some significant gaps where organizations can do a better job of risk management.
Supplier Risk Management in Periods of Crisis
As Ms. Brown notes in her presentation, as long as you have suppliers that are external to your organization, you can never eliminate supply chain risk altogether. However, APQC identified four key steps that successful organization took during the Covid-19 pandemic to help mitigate supplier risk.
- Map your supply chain. This is a good process to do even when there is not a crisis. Identify where your nodes and suppliers’ suppliers are located, and even your third-tier suppliers. This means understanding what kind of process your goods and services you are ordering need to go through to get to your organization.
- Monitor and measure the situation. Monitor and measure your situation via close communication with vendors and suppliers. Focus on building and maintaining collaborative, strong relationships that help both parties be successful. If you treat suppliers like they are one of many suppliers, they will treat you like one of many customers; this does not bode well for long-term mutual success.
- Create scenario plans. Create plans B, C, and beyond. Be prepared for “what if scenarios” and identify and qualify alternate suppliers. It goes beyond just identifying alternate suppliers. You need to make sure they can ramp up to the volume you need in the time frame that you need. Understanding the time involved is often overlooked.
- Check your contracts. Be sure you understand the implications of how your contracts are written, hat your organization is liable for, and evaluate if there is room for your suppliers to innovate in the face of crisis.
Supply Chain Disruption
Supply chains will continue to be disrupted, but the full extent will be unknown for the foreseeable future. Ms. Brown highlighted the top five areas where survey respondents anticipate further disruptions: public health concerns (87 percent), government regulations including closed borders and travel restrictions (71 percent), price hikes (71 percent), labor shortages (57 percent), and supplier failures (52 percent). This last point ties back to Ms. Brown’s point that organizations need to create scenario plans in case supplier disruptions continue.
In a follow-up question, survey respondents were asked to identify where the supply chain disruptions would hit the hardest. The top area was increased material costs (77 percent) as organizations need to route materials through different ports, change how they are shipping goods, and often will face expedited charges. The second area where respondents felt supply chain disruptions was in slower cycle times for fulfillment (67 percent). So now, organizations are paying more for slower service.
To counteract these disruptions, 71 percent of respondents are creating contingency plans with alternate sources of supply. These companies are taking steps to work around the disruptions they are facing and find alternate solutions to getting the goods they need, when they need them.
Supply Chain Risk
When it comes to responding to a supply chain disruption, preparation is key. However, a large percentage of organizations are simply not prepared. According to Ms. Brown, 30 percent of respondents indicated they have no system for monitoring global supply chain disruptions. For the remaining 70 percent that do monitor supply chain disruptions, only 33 percent have a system that not only informs them of a supply chain disruption but measures the potential impact to their company. Add to this that for 50 percent of respondents, it takes more than a week to identify impacted materials, sites, commodities, and products after an event occurs, and you can see just how little preparation exists.
Shifting from Surviving to Thriving
The big question becomes how do organizations shift from surviving to thriving? One way is to recognize that change sticks. According to Ms. Brown’s presentation, working form home may be the new normal in supply chain. Before the Covid-19 pandemic hit, 60 percent of organizations allowed supply chain employees to work from home. During the Covid-19 pandemic, that number surged to 99 percent, with only absolutely essential employees working on-site. So, will working from home be the new normal? According to the research, 81 percent of respondents assume that once things settle into the new normal, their organization will allow supply chain employees to work from home.
The second point that Ms. Brown made was that organizations need embrace the opportunity for innovation. The keys to maintaining your supplier risk after a crisis are communication, collaboration, and flexibility. Her advice for organizations is to evaluate your markets for changed needs, deeply understand your customers, and strive for next-generation supplier relationships. These tips should help to improve supplier risk management.