Recently we took our Granddaughter to see a Cirque du Soleil show. While we had seen several Cirque shows before it was her first time. The show made an indelible impression on her. She talked about it for weeks and will remember it for the rest of her life. We were proud that we gave her such a lifelong memory.
In thinking about the show and its construct I thought about the incredible amount of risk that the performers and producers are managing. These world class performers have astonishing talent but they are also working in an environment designed to eliminate risk and maximize safety.
Supply Chain Professionals, although not usually theatrical like Cirque du Soleil, also work in an environment in which they are managing a tremendous amount of risk. While most jobs are not life threatening the level of risk is still prevalent.
What are the risks that Supply Chain people deal with every day and what is Supply Chain Risk Management?
Supply Chain Risk Management
My earliest career recollection of dealing with risk was when I was introduced to “Disaster Recovery plans”. Based on a variety of scenarios we had to develop contingency plans, real actionable plans, that could be executed if a disaster occurred. I didn’t know it at the time but this was Supply Chain Risk Management.
What would we do if we lost electricity for an extended period of time? What if a hurricane destroyed our manufacturing building? What is we had a chemical explosion? What if there was a terrorist attack?
Some of the scenarios seemed highly unlikely but we needed to develop plans nonetheless.
As my career progressed and my experiences broadened I learned that Supply Chain Risk Management was more than just an annual event involving updating the Disaster Recovery plan.
Supply Chain Risk Management permeated every aspect of every Supply Chain job every day of the year!
What are the risks the Supply Chain professionals deal with every day?
Types of Supply Chain Risk
1. Continuity of Supply
Ensuring continuity of supply is an implicit part of the responsibility within Supply Chain. Without raw materials, components, subassemblies, products or services a company will not be able to manufacture, distribute, sell and deliver to its customers.
There are many factors which can lead to an inability to secure supply of the goods or services that you need to conduct your business.
A predominant issue is having single, or sole, sourced parts. If there is only one supplier for your materials and the supplier has a problem in manufacturing, quality, allocation, or even financial solvency this can disrupt your supply lines.
If the supplier provides materials that they alone are uniquely able to provide you can be stopped dead in the water. If the supplier provides materials that can be sourced elsewhere then you have a path to developing a contingency plan.
Every part of your Supply Chain from suppliers, to logistics carriers to Distribution Centres, Manufacturers and Marketing channels must all have sufficient capacity to meet your needs. This must include contingent capacity to be exercised if needed.
2. Demand Volatility
I believe that forecasting by definition will never be 100% accurate. Certainly there are steps that can be taken to improve forecast accuracy. But a smart Supply Chain professional should just accept the fact that forecast accuracy is inherently flawed and focus on deploying a lead time agnostic Supply Chain that can react to any fluctuations in demand.
The impacts of demand fluctuations are wide. If a customer has dramatically higher demand than forecast right now you can be scrambling to find parts, resources and capacity. Without a solution the demand can be perishable, as is certainly the case in e-commerce.
On the other hand if customer demand fails to materialize according to forecast you can be stuck with a lot of custom inventory, unrecovered expenses and a huge cash flow problem.
Remember that for your B2B customers in particular there are competing forces in their organization. Their Sales teams will want to pad forecasts and hedge demand but their Procurement teams will want to give you forecasts that they are more confident in. Competing forces in your customer offices will impact the forecasts they give you which can be a nightmare.
3. Cash Flow
Every business runs on cash. If you don’t have cash you are insolvent. And if your suppliers don’t have cash they will be insolvent and unable to meet their commitments to you.
Supply Chain is uniquely positioned as central to the cash cycle equation. As a combination of Accounts Receivable, Expenditures, Accounts Payable and Inventory you can see Supply Chain’s impact.
Supply Chain must deliver the goods to customers so that they can be invoiced and bills collected. Supply Chain expends money on all of the resources used to run the business. Supply Chain establishes the terms for paying suppliers. And Supply Chain manages the levels of inventory which can dramatically impact the deployment of cash.
The same holds true for suppliers. Supply Chain must ensure that suppliers are solvent and that they are financially viable. Supplier financials must be audited and monitored proactively to avoid surprises.
4. Inventory Performance
Depending on your industry Inventory levels can be one of the very top financial assets in your company. As such inventory can have an enormous impact on cash levels, the ability to fulfill and enable revenue, profitability and return on investment.
If you don’t have enough of the right inventory you won’t be able to fulfill demand and the rest of your inventory will sit idly on warehouse shelves. On the other hand if you have too much of the wrong inventory you will be left with goods that you can’t dispose of which can lead to enormous cash drains and write-offs.
Parameter management, excess and obsolescent inventory management, and a Sales, Inventory and Operations Planning (SIOP, or S&OP) business process are just a few of the tools needed to help manage inventory.
5. The Geopolitical Environment and Market Dynamics
For the last couple of years in particular there has been a lot going on in the world of politics and international relations that impacts supply chains.
Trade wars, tariffs, and demands for the repatriation of manufacturing jobs are central to Supply Chain sourcing activities. Tariffs can be financially significant enough to require the relocation of manufacturing or distribution activities from one country to another. Depending on the business being done this can either be something done quickly or something that takes a lot of time and planning.
Regardless Supply Chain professionals must be on top of what is going on in the countries in which they do business. If you can’t get your goods into or out of a country your Supply Chain will stop immediately.
6. Cyber Security and Systems Integrity
Any business large or small runs on electronic information systems. Every aspect of financial management, customer relationship management, and supply chain all run on systems.
If your systems are hacked in whole or in part that can quickly bring your company to its knees. Or if your systems go down operations will stop immediately. Imagine if your order management system goes down during Black Friday and customers can’t order your products? Customers will go elsewhere in the time it takes them to click a button.
Cyber security is a very real and pressing matter. Your business must be protected to the greatest degree possible from external threats. This includes protection of your Intellectual Property from those who would happily steal your intellectual investment.
7. Unprofessional Conduct
Early in my career a colleague was fired because he conspired to award supplier business in exchange for a bribe.
Supply Chain have the responsibility, authority and power to award business worth millions and millions of dollars. As the saying goes “With great power comes great responsibility”. Procurement integrity is absolutely essential.
Additionally your Supply Chain personnel physically handle all of your goods, regardless of value. We’ve all seen movies were they show goods “falling off of the truck”. Imagine if your team is handling highly valuable and marketable items such as smart phones. Do you have the security controls in place to ensure that none of those products just disappear?
Don’t go over to the Dark Side!
8. Skills Shortages
Supply Chain is becoming increasingly complex. With the advent of the Digital Supply Chain professionals in the field need to know more than ever before and have a broader skill set.
On top of that the sheer volume of activity is driving demand for Supply Chain skills on an unprecedented basis. The exponential growth of E-Commerce for instance and same day-next day delivery of packages has put strains on the logistics network manifesting itself in truck driver shortages.
The demand on Black Friday-Cyber Monday is so substantially high compared to other times in the year that Distribution Centres can have a difficult time finding enough people to handle this peak demand.
Further there is a growing recognition that Supply Chain is more critical than ever before and highly skilled Supply Chain professionals are in high demand. Without proper training and employee development programs you won’t be able to acquire, develop, and retain those skills. There is a real skills shortage.
If your organization is one in which Supply Chain is still not getting the respect it deserves you have an additional challenge. Getting the resource you need can be an uphill battle.
9. Weather, Natural Disasters and Global Pandemics
Earthquakes, hurricanes, tsunamis, wild fires, winter storms and more can all impact your Supply Chain. Losing buildings for manufacturing and distribution can result from any of these events. On top of that if you can’t move the goods because transportation modes or lanes are disrupted you Supply Chain will be impacted.
Now consider the Covid-19 Pandemic. That has upended virtually every aspect of our personal lives, jobs, businesses and the economy. At the epicentre of this disruption is the Supply Chain. Never before has Supply Chain been so important to help get us through this historic level of disruption.
While all of these events cannot be predicted it is true that various parts of the world are prone to certain types of weather. This should inform your plans for sourcing and logistics.
One of the biggest risk factors that Supply Chain must deal with is time. Speed is critical to ensure efficient time to market and time to money.
Supply Chain can’t rest on its laurels. Supply Chain must work hard and fast in planning, sourcing, buying, manufacturing, material handling, distribution, and overall management.
A major element of the Supply Chain is ensuring Sustainability. Environmental factors must be considered in every Supply Chain decision.
We must take the time now to reduce the environmental impact of the goods we consume, the manner in which they are manufactured, the manner in which they are transported, and the management of reverse logistics to complete the cycle.
Our impact on the environment is real and Supply Chain risk management is pivotal in creating a Sustainable future!