How Today’s Business Leaders Can Proactively Assess and Manage Supply Chain Risk
By Michael Rich, Sr. Consultant
Regardless of industry, supply chain resiliency and continuous improvement has become paramount more so now, than ever before. This is particularly important in the post-COVID and Tariff era, as industries will continue to experience major supply chain disruptions and lockdown-driven labor constraints. Many suppliers, particularly in hard-hit sectors such as energy, will be unable to weather the storm.
These are insights from 35 + years of Supply Chain experience on how to “stress-test” your Supply Chain function and ensure your business can weather any disruption.
Business leaders must ask themselves: “Is my company’s supply chain at risk?”
Supply Base Risk Assessment
Supply chains will continue to be at risk due to the lack of visibility and transparency down to lowest level of the chain. If not properly managed the impact to your business could be catastrophic given the high percentage of product and service contribution to COGS. The recovery period will vary by industry and requires both short term action and long-term planning.
Does your organization possess the resources, knowledge and experience to perform an unbiased assessment of its supply chain to adequately determine whether your operation is at risk? What is the likelihood of a significant event occurring and the potential impact to the business based on the level of risk? How are risk mitigation plans communicated to the supplier, managed and understood throughout the organization?
We assess a variety of critical dimensions to determine which categories and suppliers present potential risks. Carnrite’s approach is intended to proactively, quickly identify exposure, detect and address weaknesses in supplier performance and mitigate risks.
Larger companies are inherently more complex. Managing a multitude of supplier relationships adds even more volatility that needs to be assessed, monitored, and managed. Different functions and departments often communicate with suppliers through a variety of means, which makes it difficult to identify potential risks across organizational boundaries. In many situations, accountabilities for the management of these relationships are unclear, which can further expose companies to risks and operational disruptions, particularly given the challenges imposed on global supply chains by the Covid-19 pandemic.
Risks Linked to Suppliers
There are several risks associated with managing supplier relationships. While that isn’t to say these relationships are always risky, companies still need to be aware of these issues especially in the current environment. Listed below are the most important risk categories.
Financial – Includes cash flow, budgetary requirements, tax obligations, creditor and debtor management, remuneration and other general account management concerns. Outstanding balance to nominated suppliers added to requirements. Risk includes but limited to, insolvency, unable to make payroll and unable to purchase materials required to meet contractual obligations
Equipment – Ownership, reliability and resources required to repair and maintain. Extends to equipment used to conduct the business and includes everyday use, maintenance, depreciation, theft, safety and upgrades. Risk includes but limited to, loss of production, down-time and inability to meet contractual obligations.
Contractual – Meeting obligations required in a contract including delivery, product/service quality, guarantees/warranties, insurance and other statutory requirements, non-performance. Likelihood of signing a MSA with minimal changes. Risk includes but limited to, insufficient insurance coverage, poor key performance indicators (KPI’s) and metrics to drive continuous improvement.
Service Delivery – Relates to the delivery of services, including the quality of service provided, or the manner in which a product is delivered. Includes customer interaction and after-sales service. Risk includes but limited to, poor on-time delivery, loss of production and unacceptable MTBF/MTTR rates.
Legal & Regulatory Compliance – Includes legislation, regulations, standards, codes of practice and contractual requirements. Also extends to compliance with additional ‘rules’ such as policies, procedures or expectations, which may be set by contracts, customers or the social environment. Risk includes but limited to, penalties and fines, damaged reputation and negative publicity.
Other Commonly Overlooked Supply Chain Risk Elements
Companies that outsource a product or service must adopt appropriate controls, policies and procedures, and oversight to mitigate outsourcing risks effectively. To that end, it’s crucial to perform supplier risk assessments on these outside organizations to mitigate any potential threats. Prevention is key, and in that respect, due diligence can be leveraged as a means to nip these non-productive relationships in the bud.
Risk assessment needs to be considered as a continuous process when dealing with suppliers, not something performed once and then forgotten about. In that regard, a well-documented supplier risk management model can help ensure key issues are being addressed.
The Carnrite Group has the experience and tools to conduct a rapid assessment in order to mitigate supply chain risks and take bold corrective actions to support your operational goals and objectives.
Carnrite has the experience and tools to conduct a rapid assessment in order to mitigate supply chain risks and take bold corrective actions to support your operational goals and objectives.
About the Author
Michael D. Rich has more than 35 years of experience providing senior leadership, supply chain and strategic sourcing experience in the global arena. He has been successful in building and leading global manufacturing organizations through expertise in supply chain rationalization, cycle time improvement, supply base management, organizational strategies and global sourcing.