What your supply chain organization has to do to manage risks and prevent higher costs in case of damage.

by Lars Immerthal & Jan-Henner Theissen

Preventive, effective & digital. 

The prevailing pandemic seasons have shown us how important risk management of supply chains of entrepreneurs has become. And as much as the pandemic has already challenged supply chain’s architecture, global trade wars, cyber-attacks or climate change pose further challenges for companies' supply chains, to which they must find an answer both preventively effective and efficiently reactive (in case of damage).

Without your organizational capacities, systems support will not help you.

Every manager’s dream solution is an intelligent supporting system that could globally monitor, classify and prioritize supply chain risks according to importance and urgency.

After all, it makes a difference whether a potential risk is an outbreak of a fire at a port where their container ships are located or whether one of the suppliers announces a change in management that may perhaps affect their production or business model in mid or long terms.

However, no system works in a vacuum and the quality of inputs have a major influence on the efficacy of such systems. Despite recent developments in risk monitoring systems, external sources can only provide ex-post information, which cannot be used to prevent risk, but just to react to it.

As a result we must not ignore our own employees, who fill such systems with content and should act proactively in response to risks. Because if the organizational prerequisites for managing and mitigating risks adequately have not been created in advance, even the best system solution for risk monitoring can only be of limited help.

Fire fighting: powerful and efficient

If the risk has occurred at short notice and, above all, unexpectedly, the only thing that counts is the speed and efficiency of the organization.

Then there should be pre-defined crisis and communication plans that are routinely executed in an emergency, in order to keep the damage as small as possible and prevent a conflagration. If the organizational prerequisites are lacking, a lot of time is wasted and the costs of disrupting the supply chains increase disproportionately.

Relevant contact persons at the supplier must not only be known, but must also be available in advance to the responsible risk managers of your company. Accordingly, all persons involved can be identified and informed.

Two points are particularly important:

1. Communication is the key to any risk management. An appropriate communication platform and visualization of the activities of all parties involved must provide the necessary overview to enable rapid leadership and self-organization of the risk management team.
2. As short-term damage can occur, there should always be permanently installed crises and communication plans that are routinely executed in an emergency to keep the damage as small as possible and prevent a wildfire.

As much as these rules make common sense, it’s notoriously hard to find hard evidence showing the benefits of proper risk response preparation. There is one case, however that illustrates the depth of the potential downside of not being prepared. 

Jan Theissen, a former supply chain risk management executive, can only confirm this: “In the case of an earthquake in Italy in 2016, a standardized emergency plan for the supply chain enabled us to analyze the risk within 3 hours after the earthquake was reported and fortunately classify it as having no effect on our supply chain. In particular through clean data management and geocoding, we knew very shortly that no parts supplier or product group was affected.”

Risk prevention requires the entire organization to act as a monitor

Risk prevention is different. Here they have more time to identify risks in advance and manage them proactively, but unlike fire fighting, they will be much more involved in the risk management of their supply chain.

Here three points stand out in particular:

1. The priority here is to identify risk candidates in their supply chain with the help of a corresponding supplier evaluation and the definition of risk indicators and key figures that can be controlled by a corresponding supplier management system. In this way, you have the opportunity to contain and reduce the risks of your suppliers at an early stage with the help of development plans for your suppliers.
2. Therefore your own organization plays its own and crucial role. Imagine your own employees perceive performance losses or fluctuation in the management of your suppliers with them at an early stage. It is precisely these employees who need to know whom to contact and how to pass on this important information so that supplier management can act accordingly.
3. Last but not least, it must also be clear within the organization how to deal with risks. Whether they can be accepted, avoided, reduced or mitigated.

Here, commodity group strategies are particularly suitable for establishing a corresponding risk management system across the supply chain. Once these organizational questions have been clarified, costs can be avoided considerably in the future or existing costs for material groups can be reduced together with the supplier.

Jan Theissen, a former executive responsible for supplier risk management at AGCO, knows how important preventive risk management can be: "We were able to use an indication of an impending strike in the port of Santos in 2016 to reroute the shipment of production parts in time and prevent the coming disruption. Forces were hired to unload the transport ships and send them by air".

Is your SCRM prepared next time? Ask yourself these questions

Every purchasing or supply chain manager can use three questions to quickly determine how well his organization is prepared for a possible emergency and how quickly he can act accordingly:

• Are there clear internal assignments and responsibilities, and are they cross-functional?
• Are the key contact persons of suppliers and customers known?
• How clean is my master data (suppliers, locations etc.)?

On a strategic and more preventive level, the question could be asked whether a professional commodity group and supplier management already exists in the company or whether purchasing and supply chain management is purely operational. If the former is the case, then intelligent system support can make a much greater contribution to the company than a purely operational operation of purchasing and supply chain management. 

The targetP! Supplier Intelligence Hub provides you with precisely with all those benefits and actionable intelligence. It puts you in a position to take the right measures quickly and targeted.

Request your LIVE demo now and get to know even more breathtaking functionalities to strengthen your supply chains and take your supplier management to the next level. From supplier onboarding to supplier evaluation, from product approval to tool management and from supply chain transparency to a holistic supply chain risk management.

For more information, visit targetp-us.com/dynamic-supplier-management