Could companies be doing a much better job of managing supply chain risks? Two recent studies suggest they could.
From tech companies facing child labor accusations in China to the retail industry reeling from poor working conditions in Bangladesh to the auto industry facing supply chain breakdowns in Germany and Japan, no industry anywhere in the world is immune from a supply chain disruption. Yet companies are still struggling to get a handle on supply chain risks, even as those risks continue to rise.
Multinational companies managing a complex web of thousands of suppliers are especially prone to such disruptions—defective products, price volatility, political instability, bankruptcy, and more—because business units and suppliers have traditionally held a narrow view of supply chain risk, ignoring other potential risks (and opportunities) elsewhere in the supply chain.
Even though many companies are a lot more aware of their supply chain risks than just a few years ago, “we still have a tremendously long way to go,” says Glen Goldbach, a director in PwC's advisory practice.
A recent survey conducted by PwC and the Massachusetts Institute of Technology found that only 41 percent of 209 global companies surveyed have mature supply chain processes in place to effectively address incidents; 59 percent of companies have immature processes in place. Only nine percent are fully prepared.
“Some companies are very well prepared and have taken a very strategic approach to supply chain management and dedicate a lot of resources to it and are in pretty good shape,” says Scott Byrnes, vice president of marketing for trade management software provider Amber Road. “Other companies really haven't given it much attention, and I think a lot of that really comes down to executive sponsorship.”
An overall awareness of the risks and opportunities posed by the supply chain starts at the highest level of the organization, agrees Andrew Bartolini, chief research officer at supply chain advisory firm Ardent Partners. “It starts with the senior executives having this understanding and making it a focus,” he says.
“The backdrop of all of this is the globalization and blending of markets into one another,” says Bartolini. The need for companies to have better visibility into, and awareness of, their complex supply chains “has increased in importance, because risks have increased exponentially.”
Companies and their suppliers are more reliant on each other than ever, increasing risk. When asked how supply chain complexity drivers have evolved over the past three years, 95 percent of respondents in the PwC survey stated that dependencies between supply chain entities have increased; 94 percent stated that changes in the extended supply chain network configuration occur more frequently; and 94 percent stated that new product introductions have become more frequent.
The primary challenge when it comes to managing complex global supply chains is gaining full visibility into the extended supply chain, says Bartolini. Most companies may have a good understanding of visibility into their tier-one suppliers. But they may not have full visibility into how reliant those tier-one suppliers are on their own suppliers.
That job could get more complex. A separate study from the American Productivity & Quality Center finds that during the past two years companies have reversed a trend toward reducing the number of suppliers in order to cut costs and have added them to reduce risk. More than two-thirds said they have added suppliers to reach a better balance between sole-sourcing and multi-sourcing.
Companies are adding more suppliers for good reason. According to the APQC study, 77 percent of the 196 companies surveyed said that they had experienced at least one unexpected supply chain disruption in the last 24 months.
The APQC survey found several weak spots in supply chain risk management programs. One is that companies aren't doing enough to assess risks at their top suppliers. When asked how often companies conduct formal risk assessments of preferred or important suppliers, 22 percent said sporadically, 9 percent said never, and another 13 percent didn't know.
Mature vs. Immature
One of the first steps companies can take to size up the risks they face is to “simply map out their value chain,” says Goldbach. Many companies don't have a complete picture of the performance and resilience capabilities of their suppliers in the event of a disruption.
Companies with mature processes in place are fully aligned with their supply chain partners on the core values of the extended enterprise. “Their individual strategies and operations are guided by common objectives,” the PwC report stated.
“You need to have better communication with all your suppliers,” says Bartolini.
“The backdrop of all of this is the globalization and bleeding over of markets into one another.”
—Andrew Bartolini,
Chief Research Officer,
Ardent Partners
According to the PwC study, 60 percent of companies cited alignment between partners in the supply chain as the most important factor in enabling risk reduction. Another characteristic of a mature supply chain is stronger alignment between internal business functions, which 49 percent of respondents cited as the second most important factor in enabling risk reduction.
One thing to avoid is relying too much on the skill set and personal network of one individual in the event that a disruption occurs. “I personally think that's a little bit short-sighted,” says Goldbach. Companies will put themselves in a much better position by relying on a uniform process.
Mature supply chains also allow for full flexibility and redundancy across the value chain to be able to absorb disruptions and more easily adapt to change. Often, companies partner with various suppliers that may be located in the same part of the world, for example, and are then subject to the same geographic risks, says Goldbach.
Getting More Data
Mature supply chains are also supported by real-time monitoring and analytics. Utilizing analytics to mitigate risk in the supply chain still presents challenges for companies, but companies are getting better at developing much more “tactical and practical” solutions and gathering more data than they have in the past, Goldbach says.
THINGS TO CONSIDER
Below is a list of questions that should be considered in trying to understand where to focus attention in the supply chain, according to the PwC and MIT study.
How have changes in the business environment and in your company's strategy and operations increased the complexity in the various elements of your supply chain?
Which parameters is your supply chain most sensitive to?
Do you regularly involve your risk management specialists? Is there an established risk management process to follow as changes are made in your supply chain?
Are you serving multiple market segments with multiple customer value propositions? If so, do you segment and mitigate risks in your supply chain accordingly?
How do you monitor the spectrum of internal and external risks to your supply chain?
What trade-offs are you willing to make to mitigate risks in your supply chain (e.g., cost-effectiveness vs. flexibility)?
Are your supply chain partners informed and updated on your business continuity plans?
Do you have sufficient insight into your supply chain partners' operations?
Is there a shared understanding (from overall strategy, through to operations and out to supply chain partners) of the most important value drivers your supply chain should seek to prioritise and protect?
Is this topic on the agenda of the CEO and/or COO, or is it time to have a conversation?
Sources: PwC; MIT.
Just imagine, for example, having the capability through a predictive analytics program to overlay the geographic locations of your suppliers with weather statistics in order to calculate the probability of a natural disaster in that region. By harnessing such data, the company can then align its suppliers in such a way that it has back-up suppliers in other parts of the world to avoid potential disruptions to the business.
Companies still have a long way to go in this regard. According to the study, only 28 percent cited “data, models, and analytics” as a factor in enabling risk reduction.
Other enabling factors they listed as important to risk reduction included internal and external process integration, cited by 49 percent and 47 percent of respondents, respectively. Risk governance (44 percent) and network flexibility and redundancy (37 percent) also ranked high on the list.
As far as who should own supply chain risk management overall, Bartolini recommends that it be those in the company who have the best understanding of the company's suppliers. The procurement team has the closest relationships with suppliers and is in charge of managing the contracts, so they should be the ones who are “front and center in the management of supply chain risk.”
When new contracts arise, they are the ones who have the best understanding of which suppliers are top performers and which contracts to bid out of and which to keep.
Companies with mature supply chain and risk-management capabilities are much more resilient to supply chain disruptions. “The most mature companies today are much more holistically thinking about the supply chain,” says Goldbach. They're affected less and recover faster than companies with immature capabilities.
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