Analyze risk probability and impact to help focus risk mitigation planning
Improving supply chain resilience continues to be one of Chief Procurement Officers’ top priorities. For example, 43% of respondents to Deloitte’s 2023 CPO survey believe that procurement risk has increased significantly over the last 12 months, and 79% admitted to being impacted by supply chain shortages. One common challenge is that they have too many suppliers to be evaluated by too few staff, given the volume of data they need to analyze across a broad range of risk factors. Overstretched procurement professionals may miss vital risk signals among the noise of news alerts, compliance audit reports, and transaction history charts.
My research of procurement best practices over the last two decades found three common mistakes that many CPOs make when trying to manage supply resilience:
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Focusing assessment on “tier one” suppliers may overlook business critical risks from smaller firms. I’ve heard many clients say they started with the top 10 or 20 suppliers that were responsible for, say, 80% of their total spend. However, these rarely represent the most significant threat to supply resilience. The reason you spend a lot with them is that they are reliable partners with robust controls and resilient supply chains of their own. Low value components may represent as great a danger to revenue if they are crucial to your big selling products and you lack alternative sources.
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Supplier consolidation may cause over-dependence on a few supply chain links. Forging strong strategic partnerships with a select subset of key suppliers can bring various benefits, including product co-innovation, preferential service, and cost savings. However, it means you have no back-up option should there be a problem with that sole source. Recent history shows us that even the largest, most robust supplier can suffer disruption when a black swan lands.
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Avoiding risky suppliers limits your ability to harness innovation from your ecosystem. Some of the best ideas to improve your product will come from start-ups and other small firms. Overly risk averse firms that insist on robust finances and long track records of consistent delivery often lose market share to more agile, risk tolerant competitors. I don’t advocate recklessness, but I do urge CPOs to accept some risk in their supplier portfolio.
The key to improving your supply resilience is to understand not only the likelihood of disruption from a specific supplier but also its impact (see graphic). For each supplier, calculate your total revenue from products that include its components. Then find out how long it would take you to bring an alternative source on board, so you can estimate how much revenue you would lose while you do that. Use this combined assessment to prioritize risk mitigation actions.
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Replace high-risk suppliers unless you can reduce their potential impact. Firstly, try to move the supplier down into the “Tolerate” quadrant by finding alternative sources that you can ramp up at short notice. Look at good existing suppliers first to find out if you can expand the relationship with them. Some may even have capabilities you didn’t know they had, in different categories than the one that you currently buy from them in. Then search more broadly across firms you haven’t previously had any dealings with. If flexible multi-sourcing is impossible, then you may need to replace the overly risky supplier with a safer source, even if it is more expensive. Another option is to re-engineer relevant products to eliminate components for which there are no safe sources.
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Tolerate risky suppliers if you can cope with disruption from them. There are many good reasons for working with smaller and/or newer businesses. Many are more innovative, agile, or responsive than their larger competitors. Forward-thinking CPOs endeavor to support local- and/or minority-owned businesses as part of their ESG agenda. Build trust by working with them to help them become more reliable, such as by paying them promptly and sharing demand forecasts so they can plan better. Insist on similar transparency in return. Encourage them to share potential problems with you so you can mitigate likely disruption - instead of having to react quickly to emergencies.
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Mitigate risks from key suppliers by thorough contingency planning. Recent events such as the Russian invasion of Ukraine, power cuts in Texas, and the Suez Canal blockage have shown the danger of complacency. You don’t need to predict exactly what might disrupt supply; you merely have to work out what you could do if an extremely unlikely event were to occur. Again, mitigating risk impact usually involves finding and onboarding alternative sources that you can ramp up if required. Automated monitoring of risk information, such as weather reports and news feeds, is also vital so you can be the first to react while alternative sources still have spare capacity.
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Monitor low-risk, low-impact suppliers, but focus resilience efforts elsewhere. Don’t ignore them completely, but don’t waste scarce resources trying to get 100% coverage. AI-assisted automation is vital in managing the long tail of important but easily replaceable suppliers. For example, sourcing tools such as Keelvar can issue RFQs to suitable suppliers and place a contract with the best bidder, all with minimal manual intervention.
Key takeaway: There is too much data available on too many suppliers for manual analysis to be effective. Your supply network will remain dangerously fragile unless you can provide your team with modern AI-powered software that helps them improve resilience by finding alternative sources for business critical components, even if the current supplier appears to be invulnerable.
To find out more about how Scoutbee’s AI-powered solutions can help your organization improve supply chain resilience, click here.
