It’s not uncommon for businesses everywhere to strive towards increasing efficiency and cost reduction, and this applies especially to the area of procurement and supply chain management, where cost reduction is a key KPI. Although these goals have resulted in the creation of more efficient supply chains during typical business periods, it has also created supply chains that are vulnerable to disruptions. Supply chains today are longer and more complex, involving many stakeholders, countries, modes and logistics handoffs. And due to growth of procurement initiatives such as global outsourcing, supply chains are becoming more exposed to vulnerabilities and disruptions. Periodically, natural disasters and catastrophes also disrupt supply chain operations.
A 2005 study by Kevin Hendricks entitled The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility found that supply chain disruptions such as supplier failures, manufacturing delays, and quality issues all have deep and measurable impacts on a company’s financial health. The study states that the average effect of supply chain disruptions in the year leading to the disruption includes a 107% decline in operating income, a 7% decline in sales growth, and an 11% rise in costs. Additionally, share price volatility in the year after the disruption was 13.5% higher than in the year before the disruption. With such negative consequences potentially arising from supply chain disruptions, what can be done to manage and mitigate these risks?
Understand the risks involved
To weaken the impact of supply chain disruptions on the business, start by identifying the risks within the supply chain and developing a plan to mitigate them. These two tasks should form part of a business’ supply chain continuity programme. The two types of risk to consider include external and internal risk. External risk consists of:
- Demand risk, which is caused by unpredictable or misunderstood customers, or end-customer demands.
- Supply risk, which is caused by any interruptions to the flow of product, whether raw materials or parts within the supply chain.
- Environmental risk, which originates from outside the supply chain, usually related to economic, social, governmental and climate factors, including the threat of terrorism.
Meanwhile, internal risk consists of:
- Process risks, which is caused by disruptions of internal operations or processes.
- Organizational control risks, which is caused by inadequate assessment and planning, which amount to ineffective management or caused by changes in key personnel, management, reporting structures or business processes, such as the way procurement communicates with suppliers and customers.
Identify tools to manage supply chain vulnerabilities
There are tools that can assist procurement professionals to identify and manage the risks above. They include:
- The ISO 22301 and 22313:2012 Business Continuity Management systems, which specifies requirements to plan, establish, document, implement, operate, monitor, review, maintain and continually improve a business response plan to guard against, reduce the possibility of occurrence, prepare for, respond to, and recover, from supply chain disruptions when they arise.
- ISO 31000:2009 Risk Management system, which provides principles, a framework and processes for managing risk, and can be used by any organization regardless of size, activity or sector.
Apart from using the tools above, it’s important to emplace a business response plan to ensure business continuity in the event of a supply chain disruption. There are several methods or practices in supply chain management that can help businesses everywhere manage their supply chain disruptions and vulnerabilities effectively, as we can see below.
Encourage good supplier relationship management practices
Although procurement professionals would have put in place preventive measures to counter supply chain disruptions, they can still occur. There is a saying that ‘If you fail to plan, you plan to fail’. It is a saying that rings true in every business function, and especially in procurement, where the stakes are high. Many companies have suffered huge financial losses and alienated their customers by failing to be proactive and responsive to their suppliers’ needs. Supplier relationship management is a key role of procurement professionals everywhere, and the ability of the procurement team to build strong supplier relationships can determine whether the business sinks or swims. Good supplier relationship management involves cultivating trust and respect between both parties by ensuring that the contract between both parties are mutually beneficial, the terms and conditions of service level agreements are met, and there is constant and open communication between both parties.
Encourage flexibility in the procurement process
Flexibility in this case can refer to many areas in the procurement process. One important area involves a business’ sources of supply. A common saying that most people would have heard of is to ‘always have a back-up plan’. That is good advice, if ever there was one. In procurement, it’s never a good idea to depend a single supplier for all your business needs. With multiple sources of supply, businesses are more likely to recover from a supply chain disruption than companies with a sole source of supply. Apart from having a list of reliable suppliers, it’s also important to encourage flexibility in terms of the delivery and transportation methods of procured products and services. When finalising the agreement contract with suppliers, remember to discuss putting in place multi-modal, multi-carrier and multi-route transportation methods to avoid bottlenecks and chokepoints. Late deliveries have the potential to strongly disrupt business operations, so it’s good thinking to have a plan B when it comes to deliveries.
Managing supply chain disruptions must be a key priority for procurement professionals everywhere, as the benefits of having a business response plan far outweighs the investment that goes into developing one. An organization with a strong and responsive supply chain will have a significant competitive advantage over other businesses.
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