Global supply chains continue to evolve and increase in complexity. Companies take on more risk as their network becomes inherently more vulnerable to outside influences when scaled to global size.
Supply chain risk management is both a best practice and, thanks to FSMA, a regulatory obligation. American manufacturers will need to analyze hazards and corresponding risks to incoming ingredients, and implement supplier controls as part of HARPC. Organizations must work to identify and mitigate their supply chain risk proactively. But where do you start when it comes to building a risk management program?
One commonly overlooked risk is not just the location in and of itself but also the mistake of having multiple important suppliers in one general area.American dietary supplement manufacturers felt the strain of COVID-19 earlier than other industries as most of their Chinese suppliers were not operating at the beginning of 2020. As China recovered, and the virus spread to other countries, it became clear that a diverse supply chain has its benefits.
Here are a few key points to keep in mind when building a risk management program:
Don’t structure your risk management program based on spending or threat alone, but understand the potential revenue at risk should something happen in your supply chain areas.
Manufacturers/suppliers often have multiple plant locations, so make sure you know exactly which location is supplying your products/ingredients.
A much more difficult item to look at is your suppliers’ suppliers. Gaining visibility into sub-tier suppliers is not easy, but can be extremely helpful in these circumstances.
Know where you are in terms of market share, and understand how an unpredictable event could affect the current standings.
Have few qualified suppliers ready to proactively authorize production on an as-needed basis, to give you options in an unpredictable time of need.
Certain suppliers have more inherent risk than others, and proactively scorecarding your suppliers can help uncover the not-so-apparent risks you may otherwise overlook. For example, with automated software solutions, the data used to generate scorecards can continuously and consistently be collected, allowing your scorecard values for a specific supplier to change based on performance. These scorecards provide you with a great training tool for improving your supplier’s performance.
The real benefit of using scorecards is to have supplier’s numbers climb steadily over the following weeks and months, thus reducing overall risk, provided the results are shared and discussed with the supplier.
It’s essential to determine who your critical suppliers are. One way to do this is to identify these critical suppliers not based on top spend or top threats, but by the amount of revenue at risk from supplier disruption.
Often we see risk programs focused on the top spend suppliers, which might ultimately equate to roughly 20% of suppliers that cover the majority of company spend. However, suppose something happens to one supplier in the other 80% in which a crucial—and yet significantly cheaper—ingredient is needed to finish a product. In that case, you might be in trouble since that supplier was not given equal importance in your risk management program. This type of program ultimately protects spend and not necessarily revenue.
Another key focus we see is on geographical location based on historical disaster events. The issue with this approach is that its supplier risk is tracked based on events that have already happened, but not necessarily inclusive when it comes to natural disasters or pandemics that have yet to occur—the unpredictable ones. While these factors are necessary to include, do not weigh your entire program on such events.
Every company should have a plan in place that outlines the steps necessary should one link in their supply chain break. Once these plans are in place, it’s equally important to test them. Because while it may look good on paper, you won’t know how effective it is without actually testing it.
Supplier Management streamlines supplier qualification and sourcing, automates scorecarding, collects and digitizes supplier documents, extracts data from those documents, and organizes it into supplier performance dashboards and reports. Want to learn more? Read more about Supplier Management here.