The worldwide COVID-19 pandemic has exposed glaring vulnerabilities in today’s global supply chains, making it essential for businesses to quickly and effectively develop risk management plans for their supply chain.
Despite the last decade seeing several catastrophic events including the disastrous hurricanes that hit the U.S, Puerto Rico, and the Virgin Islands in 2017, Japan’s devastating 2011 tsunami, and 2010’s volcanic eruptions in Iceland that grounded flights worldwide, most companies were still underprepared for the COVID-19 pandemic.
The China Variable
With a vast majority of the global supply chain moving through China, it is essential to acknowledge how much Chinese firms have improved their operations over the years. They have increased capacity and output exponentially, built increasingly complex products domestically and streamlined downstream processes in domestic transport, sea freight, unloading, and customs clearance to reduce risk and administration.
On the flip side, China has introduced relatively high labor inflation for over ten years, and this has eroded cost benefits over time. Indeed, some European automotive component manufacturers, have moved operations from China to more competitive labor markets in Turkey and North Africa.
Additionally, firms that do business in China frequently fail to increase the inventory of safety stock, instead of making a trade-off for cash. When operations in China unexpectedly grind to a halt as we witnessed earlier this year, this failure adds more risks to a dysfunctional supply chain.
The Case for Supply Chain Risk Modeling
The supply chain was much simpler when companies started sourcing in China. Today the supply chain is increasingly complex, fueling the need for a Supply Chain Risk Model. Without it, companies are unable to manage the current fragility of the global business landscape efficiently.
Companies must consider every link in the supply chain, as well as risks associated with each link. Natural disasters, regional economic instability, and other potential disruptions can result in delays, higher costs, lower sales, and customer dissatisfaction.
The COVID-19 pandemic was unprecedented on the levels of global disruptions triggered. It may go down in history as a black swan event. Still, it also crystallized the need for well-defined and easily deployable supply chain risk management plans to businesses worldwide.
Best Practices for Creating a World-Class Supply Chain Risk Management Plan
In today’s global business world, there are many unpredictable events impacting supply chains. Leaders must bulletproof their supply chain and strategically think ahead to mitigate risks.
Proudfoot has compiled this five-step, high-level overview of how to start thinking about supply chain risk management plans (SCRMP) that will protect your business against disruptions in the supply chain.
1. Locate the Risks
The first step in disaster planning is mapping out every critical facet of the supply chain exposed to risk. Consider risk locations such as partner suppliers, production lines, procurement processes, transportation providers, warehousing, and technology.
Specific risks can be determined based on geography, climate, or sociopolitical events. General risks include cybersecurity and changing industry trends. For companies without an integrated SCRMP, the priority should be identifying such risks and designing operational data-driven strategies to mitigate them. By questioning the likelihood of these risks and their impact, organizations can save costs and ensure timely deliveries to maintain customer satisfaction and profit margins.
2. Quantify the Risks
Some risks cause minor interruptions while others other risks could spell disaster. Rate each risk in terms of likelihood and severity. By assigning a rating, risk management teams can predict the threat of each risk. One such method to quantify risk is the Failure Mode and Effect Analysis (FMEA). Organizations can then identify risks that need immediate attention and prioritize other risks according to their rating on the scale.
3. Build Contingencies
By building “what if” scenarios, companies can determine the response to each event if it were to happen. Risk teams are responsible for developing detailed strategies to navigate specific risks such as delays, tariffs, product recalls and natural disasters. Alternative options for sourcing are critical to be contingency efficient.
4. Build the Plan
Once you assess the risks, model the scenarios, and document the responses, teams can construct an actionable SCRMP. They include the following steps:
- Integrate industry best practices for supply chain risk management
- Create a detailed value proposition
- Meet experts to identify potential supply chain risks before and after production
- Identify a dedicated project manager or risk manager to generate ideas, take ownership of individual risks, and delegate responsibilities.
Actionable deliverables in a plan include making a list of qualified alternative suppliers by region, pricing, and other risk constraints.
Ideally, leaders should review their plans regularly as volatile business environments can rapidly lead to negative consequences.
5. Insure the Supply Chain
There are two types of insurance policies. Formal insurance policies and insurance that comes from developing the right approaches to mitigate risk.
Formal Insurance: A good insurance policy can complement a fool-proof SCRMP. A recent study found that insurance policies were the least common mitigation strategy among surveyed companies. Supply chain experts now see potential value in insurance to recoup costs in significant disruption.
Insurance companies specialize in risk management. They can also help to build proper contingency plans. Some policies provide coverage for production lines and equipment damages. Others cover upstream occurrences, such as delays of parts from overseas suppliers. Insurance may not fully cover losses, but it can soften the blow by recouping some costs and recovering from losses.
Right-execution and right-partner insurance: A risk-centric journey implies a holistic transformation of the way a change is approached, executed, and embedded and sustained in the organization. Formally insuring operations and developing a SCRMP is important; however, a clear, deliberate, expertly designed and accelerated execution of a transformation plan that focuses on objectives and priorities, assessment of likely risk impact on the current operating model, and develops a well-sequenced transformation roadmap that takes into account all stakeholders, constraints, behaviors, communications and financial implications might prove to be the differentiator between companies that survive future supply chain risks and those that don’t.
The Path Toward a Robust SCRMP
In today’s hyper-competitive marketplace fraught with risks, there is little margin for error. A debilitating supply chain leads to significant business losses and competitors can quickly grab potential market shares.
Businesses can transform positively by implementing the right change management strategies and with the right insurance partners. With clearly defined objectives, risk assessments, and priorities, companies can develop a transformation roadmap with stakeholders and costs in mind.
While designing and reviewing an SCRMP is essential, it is imperative that organizations execute them quickly and effectively. Day-to-day operations can easily derail the SCRMP if they are not implemented promptly with the right governance. Having the right partnerships and execution strategy is critical to a robust SCRMP. Start implementing SCRMP with Proudfoot!