How to manage major disruptions in the supply chain

by Greg Smith, Managing Director, Americas, Proudfoot

A specialist in operational management and digital transformation addresses the current situation and offers practical solutions.

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 chains.

Despite the last decade seeing several catastrophic events, Mr Greg Smith including the disastrous hurricanes that hit the US, Puerto Rico and the Virgin Islands in 2017, Japan's 2011 devastating 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 labour inflation for over 10 years, and this has eroded cost benefit over time. Indeed, some European automotive component manufacturers, have moved operations from China to more competitive labour 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 ground to a halt, as we witnessed earlier this year, this failure adds more risks to an already dysfunctional supply chain.

THE CASE FOR SUPPLY CHAIN RISK MODELLING

The supply chain was much simpler when companies started sourcing in China. Today, the supply chain is increasingly complex, fuelling 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 crystallised the need for well-defined and easily deployable supply chain risk management plans to businesses worldwide.

CREATING A SUPPLY CHAIN RISK MANAGEMENT PLAN

In today's global business world, there are many unpredictable events impacting supply chains. Leaders must bulletproof their supply chains and strategically think ahead to mitigate risks.

Proudfoot has compiled the following five-step, high-level overview of how to start thinking about supply chain risk management plans (SCRMPs) that will protect businesses against disruptions in the supply chain:

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 socio-political 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, organisations can save costs and ensure timely deliveries to maintain customer satisfaction and profit margins.

Quantify the risks

Some risks cause minor interruptions while 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). Organisations can then identify risks

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DIGITALISATION

that need immediate attention and prioritise other risks according to their rating on the scale.

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.

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.

focuses on objectives and priorities, assessment of likely risk impact on the current operating model, and develops a well-sequenced transformation roadmap, might prove to be the differentiator between companies that survive future supply chain risks and those that do not. The transformation roadmap must take into account all stakeholders, constraints, behaviours, communications and financial implications.

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 organisations 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.

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 specialise 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, embedded and sustained in the organisation. Formally insuring operations and developing a SCRMP is important. However, a clear, deliberate, expertly designed and accelerated execution of a transformation plan that

The worldwide COVID-19 pandemic has exposed glaring vulnerabilities in today’s global supply chains.

THE SINGAPORE ENGINEER June 2020

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