“50 percent of businesses fail in the first year and 95 percent fail within five years. Better success rates notwithstanding, a significant percentage of new businesses do fail.”
– US Small Business Administration, 2014 Statistics
For any company to be successful, it is essential that they have a complete understanding of their supply chain and a comprehensive risk management capability in place. This will ensure that their business is able to recover from unexpected incidents that disrupt their supply chain, and threaten their existence because of a failure to meet their customers’ demand.
Successful businesses manage to not only survive but thrive in the midst of cutthroat competition, unexpected regulatory changes, natural disasters and political shifts that can often shift their market dynamics. These companies have figured out how to minimize the downside and how to create opportunities when everything goes wrong.
If you are wondering how they manage to do so, here are our observations of how the most successful companies manage their resiliency:
Select your Suppliers Carefully
This most basic of all functions is the most important one when it comes to long term success. Ignoring the long term impact of doing business with a given supplier can be one of the biggest mistakes any business can make. Often perceived as a minor and obvious thing, supplier credibility is often judged based on pricing flexibility, and technology considerations. Other long term considerations influencing risk and long term scalability and performance can get ignored. Businesses need to regularly collaborate with their suppliers and reaffirm their commitment to scalable performance and risk management. This can be done by defining contract scope, and communicating frequently, and conducting regular audits. Confirm that your supplier is insured so that your business is not vulnerable in case of an unexpected catastrophe.
Understand the responsibilities and incentives between customer-supplier partner relationships
Manufacturers and suppliers have a mutually symbiotic relationship. Crafting the terms for success can create a win-win for both parties. A mutually beneficial arrangement can properly incentivize all parties to develop a quality product that has high utility to the end customer and to scale continuously and consistently. After all continuity of supply is revenue for the supplier, and revenue for the customer. An interruption negatively impacts both. Unlike most supplier-customer interactions, resiliency is an area where incentives for both are fully aligned, and that creates a tremendous opportunity for fostering strong collaborative partnerships.
Be flexible and adapt terms with suppliers based on past learnings and future considerations
As per a report by Wall Street Journal’s Jeff Bennett, General Motors Co. took an unusual step to ensure stability in its supply chain. The company invested $5 billion in Mexico and Brazil as a part of a continuous international expansion strategy. At the same time, GM came up with a strategy to allow companies to periodically renegotiate contact terms.1 This helped them recognize the impact of an automotive manufacturer on its suppliers based on the negotiated terms. The flexible terms ensured the flow of materials without a break in the chain.
Master the manufacturing regions
To ensure sustained supply chain performance, businesses need to have an effective supplier performance scorecard applied throughout the company. This scorecard primarily consists of parameters outlining both strategic and operational risks. This should include location risks based on the supplier’s manufacturing regions and footprint risks including natural disaster and geopolitical stability of the region, recovery capability, scalability and supplier reliability and ongoing operational performance risk and responsiveness. An effective risk program keeps a track of potential interruptions within the entire supply network. A quote from the 19th century Age of Revolution says, “When France sneezes, wholes of Europe catches cold.” In the modern day, it would be appropriate to say, “When northeast Asia sneezes, the global manufacturing sector catches a cold.” Hence, hypothetically, if your businesses rely on major parts imported from northeast Asia, it would be wise to keep track of the potential risks looming these regions, and the impact of a disruption along these and the dependencies of the various players that can cause a ripple through your supply network.
Adopt a risk mitigation strategy that suits your business priorities and needs
There cannot be a one size fits all formula when planning a supply chain risk mitigation strategy. The need for a risk mitigation strategy is unarguably critical, but which strategy a business should employ depends on several factors. Fortunately, there are some common sense strategies that a business can pick from:
- Prioritize based on impact and address most vulnerable areas first
- Plan to minimize the impact from many potential risks rather than planning for a single scenario
- Trade off a few operational considerations in exchange for a material risk reduction
- Devise a customizable, flexible and promptly executable disaster management plan in collaboration with suppliers
Construct a realistic network of substitutable parts even if not qualified for daily use
Create a library of product and part types and their segments to have a leverageable directory of alternate sources that can be activated in case an event leads to a disruption. In this case, strategic buffers can be sized such that the organization can execute on the actual alternate source mitigation in case the worst case scenario manifests. For example, in case of a factory fire at a critical supplier, leading to supply disruptions a few weeks out, an initial inventory buffer can help provide some time before the shortage comes into effect. During this time, the library of alternates can be immediately accessed to qualify and book orders with the alternate source or part. In this case, a plan for the mitigation helps even if the mitigation itself is not completely executed. This type of planning can provide great protection from many different types of disruptions, including mergers, acquisitions, business sale/spin-offs, natural disaster or location related disruptions, bankruptcies, leadership transitions and even operational performance risk mitigation.
Never underestimate the impact of an event: Plan for the worst, hope for the best
Some events have direct, easy to triangulate impact on a given supply chain network. Such events are obvious and their impact can be easily reported and comprehended. However, most often, we find that the impact is not direct or obvious, may be hidden in the sub-tier supply chain and could worsen due to actions of third parties like government reaction, media coverage or public actions. For example, in Feb 2016, more than 300 Brazilian companies were fined by the labor ministry for employing forced and slave labor. The situation rattled the supply chain of many businesses as trade regulations in the United States may impede Brazilian companies from importing products into the USA. In 2013, Chinese government shut down hundreds of metal polishing factories after finding safety violations in the aftermath of an accident. After 9/11, the US government shut down all US airspace for a week. During the 2008 swine flu pandemic, school shut downs caused employee absenteeism. Bottom line, it is difficult to predict the ripple effects of any one event. Therefore, best in class companies develop a flexible, resilient supply chain that can recover from any eventuality.
Look for potential problems 24×7
Early detection is vital to any successful supply chain resiliency program. The sooner a company finds looming issues, and assesses potential impact to their supply chain network, the faster it is to recover and survive major problems. A critical aspect of this is also for companies to switch from a supplier-centric focus to a holistic supply chain network centric focus. This would enable the supply chain experts to quickly tie a seemingly unrelated news event into an actionable scenario based on connections mapped to sub-tiers and supplier locations. Any supply chain would not sustain unless it stays ahead of the competition by looking for potential risks 24/7 and have a solid plan for early crisis response.
If you think that we missed out on any important trick of the business, do let us know in the comments
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