Reducing supply chain risk

December 10, 2019

When it comes to managing a supply chain, risk is a feature that can never be completely eliminated. Yes, it can be mitigated by implementing some reliable best practices for the sake of protection, like thorough research into the reliability of suppliers, and contractual clauses and stipulations devised to encourage suppliers to live up to their end of the deal. Yet, in the end, procurement personnel are often left feeling like they got a raw deal from their suppliers by the time their negotiated contracts expire, and 75 percent of companies reported that they had been impeded by some unforeseen logistical obstacle in the past year.

Fortunately, advancements in technology and software have made it possible to diminish supply chain risk to levels never previously realized in the history of procurement. At the same time, there are still procurement leaders that do not place enough effort into incorporating risk-reduction strategies that are not entirely dependent on software upgrades into their supply chain management strategies. To help combat this, we suggest a host of processes that can potentially be employed to help procurement leaders reduce supply chain risk throughout their organizations, including solutions that are both software dependent, and non-software dependent.

Strategic risk reducers

One of the first steps to reducing the supply chain risks of any organization is to evaluate the business and identify its areas of high-risk exposure, some of which will be plainly obvious, independent of the suppliers the company chooses to sign agreements with. From there, the procurement team should identify all of the potential risk scenarios, identifying which disabling circumstances are most likely to unfold, and which events are likely to provide the most costly interruptions to the supply chain even if they are highly unlikely to occur.

An often underrated source of disturbance in the supply chain is the management of product returns, which is frequently accompanied by customer refunds, and a disruption in the quantity and flow of monetary resources. Because of this, it is helpful to be cognizant of the quality of the goods and materials being provided by each supplier since a low acquisition cost is rarely worth the trouble posed by an unexpected spate of product returns. Similarly, it is often wise not to rely on only one supplier, because an overreliance on individual suppliers creates a virtual guarantee that a problem faced by a singular supplier will automatically debilitate your company.

Another way to address this potential handicap is to select local suppliers or suppliers from vastly different geographies. Obviously, this can mean purchasing products and materials with a higher price tag, but it also substantially attenuates the potential of a disastrous event in one region having a catastrophic influence on an organization's entire supply chain, because its suppliers reside within a reasonable proximity to their facilities, or in multiple locations, which reduces the likelihood that all of that organization’s suppliers would be hampered by the same event. Regionally stifling events are frequently meteorological in nature and have to do with dramatic shifts in the weather, but geopolitical interruptions are not uncommon. Political affairs like workers strikes, or sanctions placed on the production and use of certain resources, may prove to be even more stifling than weather-related work stoppages, and far more complicated to resolve.

Some forms of protection, like insurance, can be applied to the back end of the supply chain. By acquiring the right insurance for its products and acquired goods, companies can mitigate the effects of disastrous events that transpire once the goods are already in their possession. To cover accidents that occur before the goods are in their possession, businesses should ascertain whether or not their carriers have insurance that compensates them in the event of damage that occurs while goods are still in transit.

In light of the carrier’s role in providing elements of protection to their customers, it is best for companies to include all of their partners in the planning of their supply chain strategies. This way, everyone involved in the supply chain process will be apprised of the procurement team’s concerns, and they will also have advance notice of the team’s sales targets and projected dates during which increased sales are expected, and during which an acceleration of activity will be appreciated from their link in the chain.

Software and data to the rescue

Now that you are doing everything within your power to maintain the integrity of your supply chain from a pre-software standpoint, it is time to consider what the right software can do to shore up your efforts.

From the onset, you can find out whether or not your suppliers are credible and operating within lawful parameters. This includes investigating your vendors to make sure they have high credit ratings and are free of any legal judgments that have been rendered against them. Thankfully, software exists that can automate these processes, which means your staff won’t be busy scrutinizing vendors for absurd lengths of time.

Much of the software responsible for vendor scrutiny falls within the business service management (BSM) category. BSM algorithms take a vast stream of searchable data into consideration, including financial and judicial information like court documents, income statements and news articles, and then supplies procurement teams with a risk score for each potential supplier. These risk scores can then be used to approve or eliminate suppliers from contention for contracts.

Technologically savvy procurement teams can also make use of real-time data, which factors into nearly every conceivable circumstance that could alter the efficiency of the supply chain. While this includes changes in regional weather, laws, and politics, it can even include currency fluctuations, which can immensely modify the attractiveness and profitability of active agreements with suppliers.

Involvement is the key

One of the critical takeaways from the information outlined above is there is always a protective procedure that can be enacted at every point in the supply chain process to limit risk and exposure. For example, the thorough investigation of suppliers can preempt the problems synonymous with poorly-researched partnerships, and hedging against isolated catastrophes can prevent the self-imposed constraints of having too few suppliers. Likewise, monitoring data in real-time can inform procurement personnel of the moments when it is necessary to pivot toward alternative supply chain solutions, and insurance placed on products and materials can ensure back-end protection for goods that are either in transit or are already in your possession.

In short, no matter what your technological limitations may be, there will always be opportunities for you to strategize your way toward less risk in your supply chain.

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