7 minute read
SUPPLIER RISK
BY MICHAEL POWER
BALANCING ACT
MANAGING SUPPLIER RISK IN THE COVID-19 ERA
If nothing else, the COVID-19 pandemic has highlighted how much risk already existed in supply chains. The global nature of modern trade shows how much exposure is tied up in suppliers, many of which are located around the world. But the economic and health crisis brought about by the coronavirus isn’t the only danger organizations face in dealing with suppliers. How should organizations prepare as we move into a post-pandemic world?
One thing the pandemic has done is to expose weaknesses in supply chains that were already there, says Patrick Etokudo, general manager at Sherritt International Corporation. For example, while offshoring has been an effective strategy for many organizations, the practice’s weaknesses have been illuminated by the coronavirus crisis.
Many organizations have also struggled with supply capacity, lacking enough product to deal effectively with the current crisis. Single sourcing and a lack of contingency have been problems for many, and organizations that thought they had great relationships with suppliers suddenly found those relationship strained in recent months.
Over the years, companies have offshored in an attempt to boost efficiency. Organizations should now move in the opposite direction and look to either nearshore or onshore, Etokudo says, with each company and industry having to decide what the optimum mix should be.
With pressure on liquidity, some suppliers have buckled from the lack of access to cash, he notes. Natural disasters, diversity of suppliers, cybersecurity and geopolitical tensions have also affected supplier risk, he notes.
“We need to keep getting closer to our suppliers and practically manage these relationships,” Etokudo says. “Those of us who were not trying in the past need to start it now. It’s high time we understood our suppliers.”
To improve visibility, advanced industries and organizations should invest in joint improvements with suppliers while auditing their performance continuously, he says. Recent news about vaccine efficacy means that the beginning of the end of the pandemic may be months from now, rather than years. That makes for a perfect opportunity to get a line of sight into supplier distress, where in the supply chain inventory has been sitting as a result of the pandemic as well as what alternatives there are in dealing with those inventories.
ASSESS THE SITUATION
Supplier risk assessment has been an important tool throughout the pandemic, says Maria A. Greaves-Cacevski, strategic sourcing manager with Thermo Fisher Scientific. Customer focus, data quality, change management, continuous improvement and communication are the five key areas to manage when looking to determine that risk assessment for suppliers, she notes.
Thermo Fisher Scientific is a contract pharmaceutical manufacturer, and the company has been just as busy – if not busier – than it was before the pandemic, Greaves-Cacevski says. But the crisis has affected the organization’s ability to meet standard lead times, affected logistics and increased transportation costs, primarily due to increased use of air freight. Some of the company’s suppliers have also shut down sites and reduced work shifts.
“Even though we got back up to a level, our suppliers aren’t at the same level,” she says. “A supplier risk assessment asks those questions. How many shifts are you operating with? What’s your workload? What happens if you have contamination of your water supply? What happens with your tier suppliers and your raw materials? Some of our trends have been impacted because our own suppliers can’t keep up to their regular operations. We’ve had an increase in lead times, in transportation costs.”
Going forward, the company will look at dual sourcing rather than single sourcing, GreavesCacevski says. Another option is to amalgamate requirements across its North American sites, bringing it into centralized warehouses, then ordering from those warehouses rather than direct from the vendor. That option supports cost efficiencies by volume procurement while reducing the logistics involved when vendors deliver to one spot at a higher volume.
“Our sites individually are then ordering internally and managing from our centralized warehouse to our DCs or to our sites,” GreavesCacevski says.
While organizations may think they need a formal or robust supplier risk assessment that’s not necessarily the case, she adds. Some organizations may not have the resources for that. Those companies can simply take the knowledge they already have and put it into a template format.
“You don’t need to have a separate department. You don’t need to have a robust legal document. I think you just need to have a list of questions that you use for every single vendor and try to have it as specific as you can to your material as well as to your business,” she says. “That way you cover a lot of what-if scenarios long-term.”
Regardless of the challenge, partnerships with suppliers that are a win for both sides matter more than ever, says Jon Rosemberg, senior vice-president, merchant operations & program enablement for Indigo Books & Music. For example, when the pandemic hit, the company had to manage cash flow as efficiently and effectively as possible, he says. There were many conversations with vendors and those able to extend longer pay-
ment terms. The company worked with smaller enterprises that were more constrained in order to figure out a deal with them.
“It was this idea of, we’re all in this together because we were all getting hit hard. Everybody was feeling the pain,” Rosemberg says. “It was about trying to figure out how we created sustainable deals and this sustainable way of working with our partners.”
Agile communication with vendors, while always important, has been highlighted during the pandemic, Rosemberg says. That kind of communication can pay off. For example, when Manitoba shuttered much of its economy in November, Indigo already had procedures ready to deal with the situation. The company’s vendors were told to suspend shipments to stores, a move Rosemberg says shows the importance of reacting quickly as soon as new information arises.
The pandemic has also highlighted the importance of looking at supplier relations on a spectrum, Rosemberg says. On one side of that spectrum are transactional relationships in which what is bought, the price and other factors remain constant. On the spectrum’s other side are genuine partnerships in which an organization and its vendors discuss how to optimize the relationship for both sides to create value.
“The best way to react to unpredictability is when you can work together with your supplier base to understand what their concerns might be, what their challenges might be and they can understand what yours are,” he says. “If that communication is happening you find a lot of synergy that you might not otherwise find. Seeing your supplier base as stakeholders in your business – not as just somebody selling you widgets – is the key change in approach that needs to happen.”
VISIBILITY INTO LAYERS
Visibility into not only the supply base but also the multiple tiers of supply chains is important, says Chris Sawchuk, principal and global procurement advisory practice leader at The Hackett Group. During the pandemic, organizations have struggled for access to supply even with great visibility and connections with their suppliers, Sawchuk says. But they’ve still been unable to see past their first tier. Many organizations are looking to gain deeper visibility into the supply chain than before. Sawchuk sees two aspects to agility, with the first being reactive capability. If something happens, how should an organization react? The second aspect is predictive – or getting ahead of issues before they occur.
For example, in January many with supply chains in China could see the COVID-19 crisis unfolding, especially if they had employees on the ground in that country. What many organizations neglected to do was ask whether the crisis could spread beyond China. Sawchuk cites a nutraceutical company that bought forward on some products in order to avoid interruption to the supply chain.
“They were able to create a competitive advantage because their competitors didn’t do that,” Sawchuk says. “When they were starting to buy more stuff, it got locked down. Their customers weren’t getting product from their competitors. This company was able to fill in those holes and gain market share, gain more revenue all through this period of time.”
Companies need to ask what risks they’re actually trying to protect themselves against, Sawchuk says. The answer could be revenue, margins, people, intellectual property or brand, depending on the organization. Companies must then prioritize those risks while deciding what level of risk is acceptable.
“The question is where are we going to focus, and the company has to let supply chain know,” he says. SP
