Most modern organisations rely heavily on their supply chain partners to deliver their products and services. In the case of critical suppliers, organisations might not be able to provide most of their products and services without them. Resilience is key!
In some cases, without a critical supplier, entire operations for an organisation can come to a halt. For example, if the point-of-sale (POS) service provider is down at a retailer, they cannot bill their customers. Disruptions can strike unexpectedly, causing significant financial losses, operational challenges, and reputational damage.
Over the last few years, supply chain disruptions have gained much more executive attention due to Covid-19 and geopolitical conflicts, but they have been happening all the time even before.
In this article, Robin Agarwal, Head of Supply Chain and Operations Services at 4C Associates explores the importance of resilience in supply chains and practical strategies to enhance it.
Supply chain disruptions can happen due to many reasons, some of the most common are:
Financial disruption
A critical supplier suddenly going out of business is the biggest nightmare for senior supply chain executives. In most cases, the organisation should have alternate options, but it can take weeks, if not months, to ensure the return to business as usual. I have seen in many of my clients, procurement and supply chain executives spending weeks and weeks of dedicated time to resolve supplier bankruptcy issues while suffering significant disruption in their operations and financial losses.
Even smaller cash flow problems can take a toll on supplier performance, where I have seen suppliers not being able to fulfil the orders as needed as they are not able to pay on time for their operations and supply chain.
Reputational damage
Organisations today face intense scrutiny from the media, customers, and increased ESG regulations. A negative ethical or social incident (child labour, environment violations etc.) within your supply chain, especially when it comes out in public, has a huge reputational impact on the organisation. Executives have to react quickly in such cases and make changes to ensure integrity in their supply chain. During the horsemeat scandal I saw significant resources at my food manufacturing client going into reviewing the supply chain and marketing money going into assuring the customers.
Legal risks
Geopolitical tensions and sanctions can impact suppliers’ ability to deliver goods or risk. Organisations operating with global supply chains need to assess and mitigate these risks. Complex manufacturing organisations saw massive disruptions in their supply chain in the aftermath of Ukraine-Russia war. A major area of focus for organisations today is scrutinising their supply chain for dependency on BRICS nations.
Natural disaster
We all know what happened during the Covid-19 pandemic and how it prompted organisations to review their supply chain strategy. However, this is not a new issue. For example I was part of a risk and resilience project for a major automotive original equipment manufacturer (OEM) that was commissioned in the aftermath of Floods in Thailand paralysing their supply chain.
Tier –N supplier disruption
Most of the big suppliers have complex supply chains. Any impact on these Tier 2, 3 suppliers can create a significant impact as well, depending on how mature is your supplier resilience. This is the most common issue I come across. While most organisations consider these as their supplier problem, when happen, they need to bear the impact as well.
The list above is not exhaustive and there are many other complex issues, ranging from cyber disruptions to boats carrying goods stuck in the Suez Canal.
The false sense of security
Many organisations operate under the assumption that supply chain disruptions won’t happen to them. They focus on cost efficiency and day-to-day operations, neglecting proactive risk and resilience management. However, this reactive approach can be detrimental when disruptions occur as there is no framework to deal with such disruptions. In these cases, senior management has to spend a significant amount of their time while incurring higher costs. And longer time to recover than their competition.
Risk monitoring tools: Necessary but insufficient
There are many tools available to supply chain professionals today from getting financial assessments of their suppliers, sanctions watch, to supplier ESG ratings. These risk monitoring tools help identify potential issues, but they often lack real-time predictive capabilities. Organisations receive retrospective alerts, leaving them scrambling to respond. Additionally, false alarms can lead to decision paralysis.
At the time of Carillion’s bankruptcy, none of these tools were able to give any actionable warning to the companies. Also, most organisations have an extensive risk framework for onboarding a new supplier, but they don’t have an effective risk framework once the supplier is in operation. And dependency increases over time with warning signs, if any, ignored.
The case for resilience
Resilience is the antidote to vulnerability. While organisations cannot predict every risk event or control how the events unfold, it is in their gift to build adaptive capacity to withstand shocks and recover swiftly. Here are some of the basics for how organisations can enhance supply chain resilience:
- Supply market resilience
Overreliance on a single supplier or a geographic location affects resilience. Organisations should consciously diversify their supplier base, even if it means higher short-term costs. Also, they should know the alternate suppliers that operate in the market and have relationships with them even if they have no immediate plans to change suppliers. It would not only enhance resilience, but also help improve cost.
- Know your supplier
Understand the key dependencies with your supplier including within their supply chain. A mature organisation should know the key people to reach out to in case of disruption. And who they should even bring on board if the supplier goes bust.
- Contingency Planning
Develop clear contingency plans for various disruption scenarios. These plans should outline roles, responsibilities, and escalation procedures. Ask your suppliers about their contingency plans and how they will ensure business continuity when various risk scenario unfolds.
- Operational Resilience
Have Contingency-SOP instructions in place. Capture the specifications and know-how on what suppliers are delivering so alternate options can be switched on swiftly if needed.
However, just having contingency plans written is not enough. Contingency plans must be stress-tested for viability and supply chain and business stakeholders ‘fire-drilled’ through those plans, so they are aligned on key steps when disruption happens, and precious time is not wasted arguing about the next steps. True resilience is an organisational culture and employees at all levels should understand their roles during disruptions.
An ongoing process
As concluded by Christopher Jones, Procurement Director at Alstom, “Resilience planning needs to be an ongoing process, your supply base and requirements are constantly evolving. Having stress tested plans means that when disruption lands your teams are ready to act and deal with the issues.”
Supply chain disruptions are inevitable, but organisations can minimise their impact through resilience. By embracing proactive risk management practices and fostering a resilient culture, organisations can navigate disruptions with confidence and stay ahead of the competition.
