Procurement teams have never been more challenged as the number of supply chain challenges mount.
Let’s consider the last 18 months, and it’s not pretty – the financial stress and supply chain disruption (think computer chips and PPE) caused by the Covid-19 pandemic; the surge in cyber security attacks which have increased operational and reputational risks; the supply disruption and reputational risks caused by the climate crisis; tariff barriers and admin delays caused by geopolitical tensions such as Brexit and US/Chinese trade disputes; and as if that wasn’t enough, we’ve had localised incidents with a global knock-on effect, such as the supply disruption caused by the Suez Canal blockage which held back estimated $9.6bn worth of goods per day.
These shocks have shed light on the fragility of global supply chains. Business leaders and politicians have been quick to question our decades-long obsession with outsourcing overseas (particularly to lower cost Asian economies). One cited example is the global shortage of computer chips caused by the covid-19 pandemic – staff shortages in the Asian manufacturing plants cut supply at the very moment when more chips were demanded as huge numbers of people started working from home. The huge smartphone and consumer electronics buyers outgunned smaller buyers of vehicle manufacturing based chips, forcing car production of higher end models to be delayed.
So how do UK companies evaluate the degree of supply chain risk? And what strategies should be followed to ensure that both risks and opportunities in this new world are managed effectively?
First, Gather Intelligence
To review supply chain risk and opportunity effectively, procurement requires intelligent data and transparency from their suppliers and the markets in which they operate. Any evaluation without good quality data is less meaningful and potentially dangerous if key business decisions are going to be made post evaluation. Suppliers may be reluctant to be open to their clients, particularly if they are in a vulnerable financial position or nervous about losing demand.
This is where procurement needs to communicate effectively with its existing and potential suppliers, to build trust through openness. And to look for other independent sources of intelligence where possible to validate the accuracy of information being fed from the suppliers. Financial credit checking, cross referencing with clients in non-competing sectors and market research are all options to consider. Equally businesses must invest in planning tools able to rapidly detect shifting trends in customer demand and in supplier capabilities and risk factors.
Next, Risk & Opportunity Evaluation
Armed with timely supply market intelligence, Procurement must then evaluate both the probability of various supply risks and their likely consequences. ‘What if’ scenario planning is a good way of approaching this as it helps identify possible risks. Procurement cannot do everything at once so will need to work with other parts of the business to decide on which risks need addressing, in what order of priority and with what level of resource and funding.
As well as risk factors, procurement must consider supply performance. Are suppliers delivering best value, including evidencing how they are mitigating risks? If buyers have negotiated hard in the past and cut out most of the supplier profit, it may increase the risk of the supplier being unable or unwilling to take decisive action. It is also vital that service levels are being monitored carefully, to help spot any negative performance trends early on.
The third element to consider is current and future capability of the suppliers to expand products and supply capacity as markets start to bounce back. Have the suppliers been damaged to the extent that they are unable to react swiftly to changes in the market?
Then Develop Supply Chain Strategies
Once risk, performance and capability have been evaluated across the supply chains, procurement must work with other stakeholders across the business and customer base to develop sourcing strategies which align with future customer demand, internal resources and budgets.
One short term tactic might be to stock build, though this is proving more challenging with UK warehousing space at a premium and with rents climbing rapidly; this also requires that a company has sufficient cashflow funds. Smaller companies may not have the cash to make this strategy viable.
A multiple sourcing strategy, ideally across more than one region, is one approach to ensure protection against supply chain disruption. Whilst it can take time to develop, building a portfolio of suppliers can help to ensure continuous supply availability. But this only works where there are several supply options and where the products being sourced are standardised.
Many supply chains remain rigid and vulnerable to supply side shocks. To counter this, another strategy could be to push for product or service innovation or product rationalisation to enable the interchangeability of inputs, standardisation of components and switch of production sites. Standardisation also helps with economies of scale and so lower cost. Diversification of product or service or moving into new markets and new customers can help the business bypass existing supply chain challenges or take advantage of lower cost/risk supply chains.
Building strategic partnerships with critical suppliers is the most effective strategy in a world of disruption and may be critical to the future success of a business if they are unable to extract themselves from existing supply chains. It ensures business as usual whilst giving the business more influence to reduce risk, cut costs and improve sustainability. It can also help suppliers suffering from financial stress as the business can potentially subsidise them with funds (or just paying them faster) or work on shared projects to cut costs – all are more likely when there is a longer-term commitment and trust built between buyer and seller.
By integrating supply chains, the business can obtain accurate and real-time data which helps it make informed decisions at the right time. It can also share challenges and data back the other way, such as forecast demand and client behaviour trends, and pool resources and funds to streamline supply and remove costs. It has the added advantage of giving the business greater ability to manage cross supply chain challenges such as sustainability, CSR and cyber threats.
The business must also consider the logistics providers as well as the manufacturers. Increasingly there will need to be closer collaboration between companies and their logistics providers across the supply chain to ensure that lead times remain competitive and supply disruption minimised.
Future Proofing the Supply Chain
The business must continue to monitor supply risk and opportunity and to develop supply options as customer needs and markets continue to change – in other words they must future proof their suppliers. Covid has forced change to happen much more rapidly than would have been predicted and the state of flux will remain for many years to come. One example is the shift to home working and flexible working patterns. Businesses will need to monitor their suppliers’ ability to support their remote workers and digital communication and those suppliers providing adequate upskilling and support structures for their employees will be favoured by buyers.
A balance needs to be struck between building flexibility through diversification of supply on the one hand and creating strategic supply partnerships on the other. It requires careful evaluation of risks and a development of a supplier strategy over short/medium/long term. But by being proactive now, companies can use the current disruption as a trigger to shake out old rigid supply chains and to build back stronger with built in agility, future proofed and with sustainability at its heart.