Putting a Spotlight on Supplier Risk
Astonishingly, only 50% of survey respondents would be able to find supply chain continuity in the face of disruption. Henrik Smedberg, head of Intelligent Spend Management, UKI, SAP, outlines the must-have elements of effective risk management.
After years of supplier optimisation, many companies now realise they have been relying on too few suppliers and thus increasing their risk. A recent research study conducted by SAP in collaboration with Oxford Economics, found that only 50 percent of procurement and supply chain executive survey respondents are able to find alternative sources of supply in order to maintain business continuity in the face of disruption. In addition, more than half (53 percent) who manage direct spend said their organisation has one or more products that it purchases from only one supplier. This is a precarious position in the best of times, and even worse when a disruption as extreme and far reaching as a global pandemic hits. Geopolitical unrest, severe weather, even a single ship can cause disruption and impact tens of billions of dollars of supply.
The good news is that many organisations have risk mitigation plans. The bad news is that these plans are not reviewed often enough and many are not likely very effective to begin with. The same research study found that less than half of the respondents said they regularly refresh risk mitigation plans to address potential disruptions and only 32 percent believe their procurement function’s supplier risk management is highly effective.
Geopolitical unrest, severe weather, even a single ship can cause disruption and impact tens of billions of dollars of supply.
It is critically important for all businesses to assess their supply chains and ensure resilience to potential disruption. Depending on the business this could mean assessing costs, the impact of potential supply shortages or even alternative sources of materials or parts.
Time for a renewed focus on risk mitigation
Organisations need visibility in order to react to unforeseen circumstances such as a sudden supply disruption or a peak in customer demand. The same research study found that just 48 percent of executive respondents said they have near-real-time or real-time visibility to inventory levels in company facilities, and that number drops to 46 percent in supplier facilities.
Data is key, and more importantly, insights that can be drawn from data are what’s truly needed for effective supplier risk mitigation. Digital business networks and cloud-based procurement solutions provide a plethora of valuable data, but without the ability to draw insights from that data, that’s all it is: just data. By applying advanced analytics organisations can gain valuable insights that can help to anticipate bottlenecks to supply chains and address issues before they become problematic.
And it’s important to look not just at tier 1 suppliers, but deeper into supply chains. The research found that 57 percent of executives surveyed said their procurement function interprets and makes recommendations automatically based on third-party data about shipping disruptions impacting tier 1 suppliers. However, that drops to 39 percent for tier 2 suppliers. Furthermore, only 44 percent of respondents said their procurement function interprets and makes recommendations automatically based on third-party data about geopolitical influences impacting tier 1 suppliers, and fewer still (23 percent) when it comes to tier 2 suppliers.
Only digital business networks with advanced analytics offer transparency, deep into the supply chain. This is crucial to creating more efficient, resilient operations, including finding alternative sources of supply at a moment’s notice.
There are significant opportunities in diversifying supply chains, but lack of awareness about potential risk can have long-lasting effects on business performance and reputation. For some, with a renewed focus on the supply chain and efforts to reduce risk, discovering new suppliers may actually reveal new preferred vendors and partners better suited to business requirements and risk tolerance in this time of rebuilding and recovery.
There is a keen focus on developing strong relationships with a diversity of suppliers. This requires communication and mutual understanding. By proactively addressing the supplier experience, seeking feedback and opening up a dialogue, businesses can work more collaboratively together to align on shared priorities while benefitting from increased resiliency and an improved ability to drive innovation together.
Regardless of the speed with which businesses can recover from the disruptions of the past year, risk management will remain a critically important issue. To ensure supply chains can flex to meet shifting demands, it’s important to continually assess them, re-evaluate the supplier mix based on business needs, refresh supplier risk mitigation plans regularly, continually assess supplier experience and relationships, and segment suppliers based on risk.
Only with a robust and comprehensive strategy today can organisations minimise disruption that could surface tomorrow.
