The Trade Off Between Supply Chain Cost & Resilience
Branded businesses are experts at customer segmentation, understanding how any why different groups of their consumers buy their product.
It’s a very long time since consumers were segmented only by age, gender or geography.
In contrast, a large company might have hundreds of suppliers, but segmentation might only be by size of supplier or product category. Sometimes they may also identify some suppliers who can add value through R & D. From our experience of auditing supply chains there are many other ways that suppliers can be segmented.
In one case we reviewed the attitude to risk management by over one hundred suppliers of an FMGC brand in Asia.
The client had suffered from supply chain failure in the past and wanted to understand how suppliers managed risks in their business. Of course, we found that suppliers segmented into distinct groupings. A few were quite strategic at how they managed risk both within their business and with their suppliers, most focused on risk management within the business and within that group most focused on physical risks such as fire or flood but despite that, their time horizon was quite short. They were most concerned about what might disrupt production in the next two weeks or a month, few had a view about risks that might impact them in the long term.
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From that segmentation we were able to develop action plans with different groups to show demonstrable improvement to how they managed risk from making simple changes through to implementation of tried and tested business continuity plans.
Where to start
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Has Cyber or any of these other risks changed how companies manage suppliers? Any comprehensive supply chain risk management strategy has to be multi-functional to reflect this diversity of potential disruption.
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Don’t take for granted Procurement and quality, component parts need to be good value and be safe, but what has their experience taught you about supply chain risks? Risk management workshops are useful exercises to identify near misses and “what keeps us awake at night”.
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Map and understand the supply chain as far as possible, where is risk concentrated, at tier three or tier four? This is not easy, suppliers aren’t always happy to cooperate and it may depend on the buying power and influence you have.
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Who are critical, high dependency suppliers, how do they manage risk in their business? Ask for a copy of their BCP and see what you get? Understanding what risk improvements are required can add factors to commercial negotiations. “Improve your fire risk mitigation and we’ll give you a bigger share of our business”.
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Develop product category supply chain risk management plans, different categories require different solutions. This includes supply facilitators such as logistics that connects the different tiers together. The collapse of Hanjin and the current chaos at UK ports demonstrate that logistics can’t be taken for granted.
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Take a multi-functional view on supply chain decision making involving Risk Management, CSR, Logistics, IT security, Procurement and Quality Control. Many day to day decisions may be driven by price or availability, but that can be within a strategic supply chain framework. Such cross-functional working can be a challenge, cutting across organizational structures, but risk mitigation often relies on solutions involving input from multiple functions.
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As important, most companies are part of someone else’s supply chain, showing you can manage continuity of supply is a differentiator alongside price and quality. In that respect supply chain management is as important for the Sales team as Procurement.
Developing your Supplier Framework
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So what matters to you about your suppliers?
Price and quality, yes, but what else?
Developing a balanced score card enables the company to assess suppliers across multiple criteria. Alongside price and quality perhaps Corporate Social Responsibility and Business Continuity Management are key measures. Equally it could include financial stability, cyber security or logistics management.
There are many options, but there is no point being too complex. What are the three or four critical factors how you want to measure suppliers risk management and how can these be included in supplier evaluation?
So, what’s the benefit?
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What this work often shows is that different types of suppliers have a very different attitude to risk. Smaller and more local suppliers tend to have a more short term attitude to risk. Business continuity for SME suppliers is often about supply over the next two to three weeks. They pay less attention to risks that might disrupt them for longer.
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Different product categories have varying risk profiles and resilience due to the nature of the product, ability to substitute or the number of available suppliers. A risk management strategy by different product categories can account for these differences. A retailer or restaurant that uses bread will want daily deliveries but if their normal suppler can’t deliver for a period of time it is quite probable other bakeries won’t have the spare capacity to fill the gap at short notice. The solution maybe is to find a substitute. In this case, if there are onsite ovens frozen bread can fill the gaps and stocks kept at distribution centres. Maybe this ties up cash in stock that may not be readily used, but if you’ve only got only one bakery supplier that cost may be a reasonable trade off to maintain continuity of supply.
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Another “trade off” between cost and resilience is understanding the Business Continuity Plans of key suppliers. How long would it take to resume production at another site if the existing site is out of action? If their plan can demonstrate they can resume production within a month, do inventory levels need to change to reflect that?
Supply chain disruption isn’t just about tangible component products. Any review of what a company spends with suppliers will identify other risk areas. What is outsourced, staffing, security, payroll, cleaning, logistics? Look at how Covid-19 changes in migration regulations in the UK are impacting availability of temporary and migrant workers in sectors such as agriculture and nursing. It’s not just the direct impact on those sectors but on their customers as well.
In Asia, the other risk factor is natural catastrophe. Typhoons happen every year and tend to take similar directions. Likewise flood zones are known. The variable is the precise locations and the quantum. Earthquakes and tsunami’s are less frequent, but we know where they could occur. How many suppliers are in known flood, quake or typhoon zones and what contingency plans do they have? Suppliers in northern China need roofs that can withstand the occasional heavy snowfall. In southern China they need roofs that can withstand high wind speed from severe typhoons.
By building a 360 degree understanding of supply chain risk a company can start to create supply chain risk scenarios. What would be their impact and how can this be mitigated? What happens if a super typhoon goes through central Vietnam or the Port of Singapore container terminal is shut down because of a cyber attack? Such scenario exercises are unlikely to predict actual supply chain events but they do make the company better prepared to deal with the unexpected.
Many of the mitigating actions require capital expenditure or increased inventory. Companies can’t have an open cheque book for these costs, but they can gain a better understanding into supply chain risks and make selective investments to support supply chain continuity. Perhaps the biggest benefit is having the insight to know where to make selective investments that have the most effect in protecting an often fragile supply chain.
To talk further about your requirements and how we can help, please contact us.
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Peter Jackson
March 2021