Author

Andrew Woods

Published

16 July 2024

Estimated Read time

6Mins

Without a critical supplier, entire operations for an organisation can come to a halt.

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. 

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: 
 

  1. 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. 

  1. 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. 

  1. 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. 

  1. 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. 

Read the full issue of SCS here!

Author

Andrew Woods

Published

Estimated Read time

6Mins

While environmental and climate change used to be the main topic of discussion, human rights and supply chains have taken over

In recent years, supply chains gained momentum as the leading social issue for companies to address. While environmental and climate change used to be the main topic of discussion, human rights and supply chains have taken over. This is partly due to the scandals and allegations of exploitative labour practices from multinational companies. But also due to the increased public awareness of the role companies play in determining the management of their own supply chains.

Social sustainability

The shift to focus on social issues acknowledges the profound impact that supply chains can have on our communities, labour rights, and societal well-being. Progress has been made in greening supply chains, but addressing social sustainability is a complex challenge yet to be achieved. A holistic approach that integrates social responsibility in a meaningful way into every aspect of the supply chain is the way to go. Then businesses can make a difference in the long-term.  

Understanding the social issues in supply chains 

First and foremost, we need to understand what the risks and impacts are in supply chains. These largely depend on the industry and the part of the world where a given company works. Social sustainability in supply chains encompasses fair labour practices, human rights protection, community engagement, diversity and inclusion, and ethical sourcing. Building social sustainability requires a more thorough look at these issues: 

  • Labour exploitation 

Supply chains often involve complex networks of subcontractors and suppliers. This can lead to challenges in monitoring and ensuring fair labour practices. Exploitative conditions such as low wages, long hours and unsafe working conditions can be prevalent, especially in industries like manufacturing and agriculture.  

  • Worker welfare 

Ensuring the well-being of workers throughout the supply chain is essential. This includes addressing issues around child labour, forced labour, discrimination, lack of access to essential benefits like healthcare. Issues around exploitation and worker welfare are especially troubling in the gig economy or in sectors with seasonally contracted workforce.  

  • Labour rights violations 

Encompassing the restriction on freedom of association and collective bargaining. I have had several clients whose subcontractors employed workers without employment contracts, completely violating local labour laws.  

  • Human rights risks  
  • Ethical sourcing 

Companies face challenges in ensuring that their supply chains are free from human rights abuses, modern slavery, human trafficking and exploitation. Ethical sourcing policies and enhanced due diligence can screen out suppliers who can’t comply with legislation.  

  • Conflict minerals 

Sourcing minerals from conflict-affected regions can contribute to human rights abuses and armed conflict. Companies can implement measures to trace the origin of minerals and avoid financing conflict or further contribute to human rights violations.  

  • Indigenous rights 

Many supply chains involve land acquisition for resource extraction in areas inhabited by indigenous communities. Respecting Indigenous rights, including land rights and cultural heritage is crucial to avoid access restrictions to natural resources.  

  • Community and land-related aspects  
  • Land displacement 

Though, we previously mentioned land issues in relation to indigenous people, supply chains might lead to land grabs from other communities. Proper consultation, compensation and resettlement plans are necessary to mitigate the negative impacts on affected communities.  

  • Community engagement and development 

Enterprises have the responsibility to contribute positively to the communities where they operate. In certain developing countries, these manufacturing facilities provide the only ‘good’ jobs and communities rely on them economically. Engaging with the communities and supporting local development through CSR programs is a popular way for companies to build lasting relationships.  

Strategies and Tools for Enhancing Social Sustainability  

Achieving social sustainability in supply chains requires a multifaceted approach that integrates social considerations into every stage of the supply chain lifecycle. When I work with my clients, I always look at three key pillars: legal requirements, voluntary standards, and management systems.  

The EU’s adoption of the new directives specifically targeting human rights and environmental impacts in supply chains adds to the long list of legal requirements companies need to follow to address modern slavery risks and practice corporate responsibility globally. Most of the legislation is not prescriptive in terms of what needs to be done exactly. But they do require companies to enforce corporate level standards on suppliers. Some companies have started including standard contractual clauses that require suppliers to follow legislation and adhere to the company’s policy on social topics.  

    Voluntary standards and certifications 

    There is a wide variety of voluntary standards and certifications that companies can explore on their social sustainability journey beyond legal compliance. Plus, there are certifications on Fair Trade, SA8000, Ethical Trading Initiative (ETI) Base Code and decent work. There are also some more sector specific standards and certifications such as ethical fishing for food producers. It is up to companies to decide if they want to improve their practices by updating systems in line with best practices.

      Supplier collaboration

      Supplier collaboration through the provision of capacity building and training are great tools to raise awareness on labour rights, health and safety, diversity and inclusion and support suppliers to establish their own traceability systems. Typically, the supplier code of conduct is a legal requirement, but it could be extended to include more detailed expectation. These might include labour standards, human rights, environmental practices and ethical business conduct.  

      I would consider community investment through CSR programs as a voluntary initiative that allocates resources towards community development. It is ideally driven by the needs of locals and might include a combination of paying for services and providing training or education.  

      Management systems  

      Company management systems include the collection of policies, processes and management plans. Most of the policies are legal requirements as per my previous points. However, there can be additional policies focusing on areas where the company is exposed to risks in the supply chain. For example, HR policies typically include minimum age requirements.

        Although, if the risk of child labour is relevant to the company, they might decide to have a separate policy on the prohibition of child labour. Following on from this example, a management plan would identify the risk of child labour. Whether it is for direct employees, contractors or subcontractors. This will describe a process to verify, record, audit and report on the age of workers. Supply chain specific management plans might include traceability and mapping, a supplier management plan, a supply chain risk assessment plan etc.  

        Stakeholder enagagement

        The other important aspect of a company’s management system is stakeholder engagement and complaints management. Effective stakeholder engagement can facilitate the feedback mechanism from communities and workers in the supply chain.  

        Creating socially sustainable supply chains is not just a moral imperative. It is also a strategic business imperative in today’s interconnected world. If we prioritise social responsibility by embedding it into the operations, businesses can mitigate risks, enhance reputation and create value for society. Ultimately, building social sustainability requires a collective effort involving businesses, governments, civil society and other stakeholders.

        We need to work together towards common goals to create supply chains. Not only to deliver economic value but also promote social justice, equity and dignity for all.  

        Ildiko Almasi Simsic is a social development specialist and Founder of E&S solutions which has developed the world’s first E&S specific research assistant – myESRA™.