In a previous article: Building resilient Supply Chains, we described how today’s global Supply Chain networks are exposed to other and new risks: disruptive new business models, pandemics, increased vulnerability of our economic models due to climate change and natural disasters, cyber attacks. But also evolving trade regulations and shifting taxation models are bringing extra complexity and uncertainty into how global Supply Chain networks are configured. Supply Chain managers need to develop better, more structural and multi-disciplinary risk mitigation strategies, in order to become more agile and resilient to these new challenges. But how do we best do that? In this document, we provide 4 fundamental actions that will make Supply Chains more resilient.
Step 1: Obtain an overview of the logistics flows in your Supply Chain Eco-System
The first thing to do, is to understand the ins and outs of the Supply Chain network that your are a part of. Getting a clear view of your value chain is fundamental to becoming more shock-resistant. To do so, you can draw a Value Stream Map (VSM). This is a visual representation of the logistics value chain: from producer of basic raw materials, to end consumer, also showing transportation times and buffer stocks. This way you get a clear picture of the eco-system of which your company is a part.
You first plot all internal Supply Chain nodes on a flow chart using symbols: the production units, your regional distribution centers and your local warehouses. Then, using arrows, you draw the main goods flows between all these nodes within your network. Also add the lead times and the transport modes used: for example, the transit time from a production site in China to your European distribution center (per twenty-foot container) is 35 days via maritime transport, including port operations and consequent road transportation. Also indicate how long your production process takes and how many days or weeks of inventory you keep in each node.
Then, similarly, also apply the external Supply Chain points to your schedule.
The customer side
Let's start with the customer side: who are my customers (or customer groups, market segments) and where are they located? Through which channels are my products distributed and what does the value chain look like? Where are the main distribution centers and distributors of my products located, but also, how does online sales compare to the “classic” distribution channels? This exercise deals with the rapid changes and new threats of today, including not only the classic “physical” flow of goods, but also the online data exchanges and business transactions that take place via the Internet. The Distribution Network will typically look different for the part of the business that comes through the Internet. The last-mile logistics for your internet business often outsourced to a courier who is responsible for direct shipments to the customer or delivering consumer orders to a pick-up point from a postal company. It goes without saying that these flows must also be mapped.
The supply side
After we have mapped out the internal links and the distribution channels to the customer side, the same exercise must, of course, also be made on the supply side: who are my key suppliers, where are they located, and how is the supply process going? Make sure to include the transshipment company, which unloads your containers in the port and transfers them to the truck, in your VSM. But also, equally important, to define who are the suppliers of my suppliers, what exactly does that chain look like, and what exactly are the transit times and buffer stocks there.
Every step in the logistics process is important and must be mapped out, because as the saying goes, “the chain is only as strong as the weakest link”. After all, the objective of a VSM is to obtain an overview of the end-to-end logistics chain and with that clear view, in a second step, to make targeted adjustments to be better armed against Supply Chain shocks or disruptive events.
Step 2: Develop a Supply Chain Risk Management Plan and Calamity Management Playbooks
In this second step, we will map out the vulnerabilities of your specific Supply Chain. This step is about raising awareness, in other words, developing structural insights into the Supply Chain risks that your organization is exposed to, in this rapidly changing world.
An effective technique for this is the so-called Failure Mode & Effects Analysis (FMEA) where you map the internal and external risks of your Supply Chain. What can go wrong and what consequences, worst case, can this have for my Supply Chain organization and the other stakeholders: customers, suppliers, employees and shareholders?
Suppose you are an importer and distributor of food products. An undetected quality issue at a supplier right at the beginning of the food chain can trigger health risks to the consumer at the very end of the process. In the digital age in which we live, such an incident can be picked up on social media, which can also lead to a great deal of image and commercial damage for the producer himself and every subsequent link in the value chain.
An FMEA helps you to map the Supply Chain risks in a structured manner. For each step, in every underlying process, it is estimated what can go wrong, how big the consequences can be and how sharp your vision is to identify and correct errors in time, when they occur. The combination of these 3 factors gives an indication of the vulnerability and risk exposure of each specific step in your Supply Chain, and of the exposure to internal and external risks, changes and errors.
You can not only apply this technique to assess the internal risks, but you can also apply it in the same way to estimate for example whether the availability and price of the products you distribute strongly depend on the success of the harvest of a base ingredient on another continent. You can also check in this way whether there are certain distribution centers in your logistics chain that carry a higher risk of failure (for example, because they are located in a politically unstable region, or because the company in question is located in an area that was struck by severe thunder storms and flooding several times in recent years).
We use the FMEA method to subject our Supply Chain to a thorough investigation and we do this from multiple perspectives. Firstly, the Supply Chain Network Configuration itself (using the Value Stream Map we described above), but we will also look at Supply Chain Risk from the perspective of its underlying business processes. We will also describe how we can make our Supply Chain Network and its processes less susceptible to intrinsic or external risks. For the sake of completeness, we should mention that there are other dimensions that need to be investigated: the IT dimension for example (investigating and managing risks due to the software systems and the information flows that support the Supply Chain) ... To become more shock-resistant, a Supply Chain must be examined from all these perspectives in order for it to be (pro-actively) improved.
Let us start with the risk analysis for the Supply Chain Network configuration
- The Value Stream Map from the previous step offers a clear view of the logistics network and shows the flows and interactions between your own locations, your customers, suppliers, logistics partners, etc. It is a first, important step towards developing a more resilient Supply Chain.
Next, gather a cross-functional team of people from your various Supply Chain and logistics departments and, with their insights, do a brainstorm about the potential risks they see or may even have experienced. This type of exercise usually quickly leads to an initial list of things that can go wrong in the various links of your logistics network: a company fire can break out at an important supplier, or a strike in a port, or at your logistics partner. The structural updating of information about events within your logistics system also provides interesting insights into where exactly which risks exist.
The Process Approach
- The Supply Chain Council's SCOR model can be a pragmatic (and proven) canvas, the overarching Process Framework, for identifying and assessing the risks of a logistics chain. The SCOR model is based on the 5 sub-domains of Supply Chain management: Plan (planning), Source (Purchase), Make (Producing), Deliver (Storage & Distribution), Return (return flows). For each of these 5 pillars, there are a number of underlying business processes. These processes describe things in detail and are a key input to your risk assessment exercise. You can use your business processes, for example, to determine what the purchasing process looks like, how exactly production is done, how the warehouse is organized and how the distribution to the customers takes place. Step by step, for every process.
- Each step, of each process is then subjected to a risk analysis, again using the FMEA method we described earlier. This time, we consider every process step. WHAT can go wrong, are the CONSEQUENCES minimal or major and to what extent are you able to NOTICE and correct errors in time. The same method, because again, the combination of these 3 factors gives you a fairly accurate estimate of the vulnerability of a given process and its potential impact on your Supply Chain and your broader business.
You can apply this technique not only to map the internal and external risks, but by assigning scores on to the 3 indicators (What can go wrong, how big are the consequences, and can you spot the error in time), you can also effectively prioritize your risks.
After you have identified and prioritized the risks, you must define control measures and mitigation approaches. These can be working methods, exception reports, fall-back scenarios or playbooks that can enable you to deal with each of the risks to a greater or lesser degree. Define solutions and a proactive approach to address your prioritized list of risks, and as such, complete your risk mitigation plan. Take the time to develop playbooks that address those risks, for example, by determining allocation prioritization rules in the event of unforeseen supply issues, or by mapping out all possible alternative, 2nd line suppliers (in case the flow from a main preferred supplier would become unavailable due to a calamity). You might also address this from a capacity perspective, for example by deliberately building buffers such as strategic stock levels. Alternatively, you might structurally over-dimension critical production capacity or you might develop the ability to support certain critical operations flows from multiple production or distribution centers, etc etc… As you can see, a risk mitigation strategy can be a multitude of practical measures, or more strategic decisions, policies and playbooks.
Step 3: Purchase and plan differently
The purchase function has rightly gained an increasingly important weight and a louder voice in the policies of many companies over the past two decades. Traditionally the focus of purchasing was on acquiring products and services at the best possible price. In parallel with the globalization trend, a shift occurred towards including the quality of the products and services in the purchasing process. Many purchasing managers concluded that the increasing geographical spread of suppliers to other countries, and to other continents and time zones, with a different quality culture, also required a different follow-up and assessment. As more and more purchases were made internationally, the weight of the measurable quality of these goods and services purchased elsewhere increased in the purchasing process. It was an externalization of the evolution towards a real global economy, supported by truly global logistics networks.
Subsequently, the idea of Total Cost of Ownership (TCO) began to develop in the 1990s, where purchasers not only looked at price and quality, but also considered the importance of a number of other factors: logistics costs, administrative rules and procedures and the associated workload. But Strategic Sourcing also started to gain importance. Nonetheless, however, strategic sourcing today focuses mainly on the same basic criteria stated above, namely optimizing the mix of price, quality and related costs. In a number of cases it led to a drastic reduction in the number of suppliers, in an urge to achieve economies of scale and standardize supply processes.
However, when you depend on just a few suppliers, or perhaps in some cases only one supplier, this carries a disproportionately high risk. If the factory of that one supplier is hit by a company fire or a cyber-attack, the consequences are much higher, than in case you would have various competing suppliers. These types of dependencies (and the associated increased risks) will need to be factored into the equation.
The increasing awareness of the new instabilities of our modern world will give rise to increased importance of risk management in purchasing processes. In other words, the “risk” factor must be given greater weight in determining sourcing strategies and in concluding and awarding purchase contracts. In order to tackle this exercise in a structured manner, companies need to be ready not to focus on short-term benefits through financial spend reduction programs only, but to find a good balance with removing intrinsic risks from the core of the Supply Chain. That might come with short term costs, but is in fact the insurance cost that companies are accepting to pay, in order to prevent being out of business when things go wrong. Of course, these considerations need to be brought to the table with laying out the criteria for bonus plans of Supply Chain executives and purchasing managers. The typical short term, measurable elements such as realized spend reduction, customer service and order fullfilment percentages, of course remain important, but organizations should assign more weight to the contribution to better Supply Chain resilience.
Step 4: Better data flow = better goods flow = More resilient Supply Chain
The chaos caused by the Covid-19 outbreak, clearly demonstrated the importance of having access to information quickly. Data Integration and Information exchange are fundamental parts of Supply Chain management and Covid-19 re-emphasized the power of correct, accessible data, particularly so in globalized and complex Supply Chains. Companies that had already achieved extensive data integration with their suppliers before the crisis, were the first to “be back in business”. They gained market share and got back to normal, ahead of competition. Interconnected Supply Chains, with extensive information sharing, are simply more resilient to shocks. Companies who have (real-time) insight into the stock levels of their suppliers and who have access to data of third-party logistics and transportation companies, can better estimate the supplies to their own factories and warehouses. If you receive regular updates about what is leaving your distribution network and what is being sold at a retailer level, you can use that information to make quick decisions on what you need to manufacture. It also tells you immediately what orders you need to place with your suppliers. The better the information flow, the better you can organize the flow of goods, the better positioned you are to react when things do go wrong because of unforeseen events. Companies that have strongly integrated with their suppliers’ and customers’ logistics systems and processes, are more likely to handle crisis situations. Embrace the technology evolutions of our times, make use of the Internet of Things, Blockchain and Big Data. So, build Supply Chain Control Towers: reports that offer a holistic overview of supply and demand throughout the value chain, both at a high and low, detailed level. The Internet of Things provides real-time updates for these reports. Every sale worldwide is recorded: every bill of lading, every container movement anywhere in the world... Nothing escapes the all-seeing eye of the Supply Chain Control Tower. Digital Solutions of today are fundamental tools for strengthening our Supply Chains, making them more resilient in a world that is increasingly volatile.
Covid-19 is a wake-up call for companies and Supply Chain managers in particular. But with good preparation and a structured risk management approach you can go a long way. Feel free to contact the author of this article for questions, advice or consultation. Think Supply Chain. Think Moore.