Part 3: Implementing a successful SCRM Program
Imagine a large electronics OEM facing a loss of hundreds of millions in revenue because the supplier of one part decided to spin off a business unit.
If you’re a veteran supply chain or procurement professional, you know that that seemingly minor events anywhere in your supplier network can create major, costly headaches. A robust supply chain risk management (SCRM) program can provide early warnings of such events and help you prioritize and execute risk mitigations. Implementing an SCRM program is the focus of Part 3 of our series based on Resilinc’s Ultimate Guide to Supply Chain Resiliency. If you haven’t yet, read Part 1 and Part 2.
In the scenario referenced above, the business unit – that the supplier spun off – manufactured a connector that was essential to a product that earned the OEM $4 billion per year. Even though this supplier was the only source of that connector, the supply chain team had not prioritized it for risk assessments because the supplier was billing the OEM only about $250,000 annually.
When the acquiring company decided to discontinue the line of connectors, the OEM’s supply chain team spent about $700,000 trying—and failing—to develop alternate sources for the connector. Its best option to protect the OEM’s revenue was to place an advance buy for several million dollars.
Identifying and mitigating these types of hidden supply chain risks is what supply chain teams can accomplish with a successful SCRM program. As described in the previous article, the Planning phase of an SCRM program focuses on building the business case, achieving support from stakeholders and leaders, developing a charter and securing funding. Once those milestones are accomplished, implementation begins by refining the core services to be provided and the outcomes expected. Resilinc recommends that SCRM programs encompass four core services: risk intelligence, risk monitoring and response, risk analysis and risk treatment. For purposes of this article, we’re going to focus more detail on the risk treatment and response component because this is where risk mitigation measures are identified and implemented proactively—that is to say, before disruptive events occur.
Resilinc has found it useful to separate risk treatments and responses into four categories:
1) The risks identified are accepted based on risk tolerances and thresholds,
2) Where risks cannot be accepted and mitigation is cost effective, proactive measures are implemented,
3) Where proactive mitigation is deemed too expensive, supply chain event monitoring (see below) is used to obtain alerts and early warnings about risks of disruption from suppliers and logistics nodes,
4) When risks are high but mitigation is infeasible, risk transfer (insurance) should be considered.
For proactive risk mitigations, costs vary significantly—and so will time-to-implement. Below is a partial list of proactive mitigation options, organized (loosely) by the time that is generally required to implement them.
PROACTIVE MITIGATION OPTIONS (by time to implement)
- Inventory/safety stock management and daily (control tower) monitoring
- Forward buying or hedging to mitigate cost risks
- Closer collaboration and planning with suppliers (Tiers 1 & 2)
- Active supplier monitoring combined with early detection
- Alternate or dual sourcing
- Contract management, including risk sharing and performance-based contracts
- Supplier business continuity program standards
- Designing products for resiliency, including component substitution and postponement or delayed differentiation strategies
- Designing supply networks for greater resiliency
- Rationalizing product portfolios
- Pooling inventory across companies and sharing inventory management systems
- Regionalizing production and distribution to better match supply with demand and lower shipping risks and costs
- Vertical integration
The value drivers of products should also be weighed. For example, risk tolerances for a product differentiated by innovation may be higher than is typical. For this type of product, flexible risk-sharing contracts rather than a build-up of inventory buffers are appropriate. On the other hand, if availability is a key value driver, inventory buffering is a more logical response.
It’s also important to remember that the costs and benefits of proactive risk mitigation can vary dramatically by industry. In life sciences, for example, qualifying a new supplier can take at least three years due to regulatory requirements. Thus, when SCRM teams in this industry analyze risks inherent in sole-source supply agreements, they balance those risks against the high costs and long time-frames to qualify new suppliers.
But relying on sole-sourced materials and parts is a significant risk for companies in all industries. In the full Ultimate Guide, you can find more resources to guide your evaluation and mitigation of sole-source supply chain risks, including on page 52 a risk-weighted matrix of mitigation options for high-impact, single-sourced parts.
Where proactive risk mitigations are too costly or infeasible—a supply chain team must be sure that it has a robust, real-time event monitoring capability, such as Resilinc’s EventWatch, which digested more than 1.7 billion news feeds from about 3.5 million sources to alert customers to 6,192 potentially disruptive events in 2020.
While 2020 was an extreme outlier in terms of the supply disruptions caused by COVID-19, our EventWatch data revealed two types of events occurred most frequently across the world: factory fires/disruptions and changes in the ownership or management of firms—like the business spin-off described at the top of this post.
As the supply chain profession rebuilds from the pandemic, those firms with robust SCRM programs will be in a better position to thrive and achieve competitive advantages. In next week’s post, we’ll take a look at the Institutionalize phase of developing a robust SCRM program—the phase that achieves the deepest savings and ROI and that requires the most sophisticated change management by supply chain leaders.