The pandemic has highlighted that risk management issues are often too narrowly focused.
The pandemic has highlighted that risk management issues are often too narrowly focused. Traditional, linear, and fragmented supply chains are no longer good enough and recreating supply chains locally isn’t a viable solution. Instead, we need a networked supply chain that is unified, collaborative, and intelligent. By proactively collaborating with, listening to, and understanding the trading partner experience, companies can minimise disruption, accelerate savings, and deliver innovation faster.
Unpredictable risks are, by definition, unpredictable, but as this article from Mckinsey points out they do seem to happen with increasing regularity. To stay a step ahead, organisations need to be agile and challenge accepted thinking. This includes changes to traditional supplier relationships. Here are a few key areas to focus on in 2022:
Strategic risk management
The pandemic has ensured risk is now a top priority for every business. McKinsey research found 95 per cent of respondents have formal supply chain risk management processes, while 59 per cent have changed risk management practices in the past year.
Effective risk management needs to be about more than just financial considerations. Chief procurement officers should place equal importance on sourcing strategies, the impact of the labour shortage on supply chains, and supplier location. Historically, risk mapping has been between the buyer and seller, and traditionally has been one-on-one, but to minimise risk we now need to understand supply webs rather than simple links in a chain.
Mutually beneficial relationships are more important than ever. Traditional buyer and seller relationships are zero-sum games, where I win when you lose, or I lose when you win. This needs to change because it’s possible for both parties to prioritise positive sum outcomes by working towards joint objectives and shared risks.
Suppliers are essential to managing quality and costs, but it’s easy to lose sight of this when drawing up contracts. Formal relational contracts allow you to set out mutual goals, encouraging trust and collaboration.
A growing number of large organisations are taking a new approach to contracts. Harvard Business Review highlights a formal relational contract between FedEx and Dell, which has seen defective parts fall to record-low levels and led to a significant reduction in scrap (67 per cent) and costs (42 per cent) in just two years. Trust is vital in building successful relational contracts, so data visibility and transparency is essential.
Improving visibility
Despite the good intentions to improve risk management, a lack of visibility beyond tier-one suppliers is leaving many companies exposed. Some buyers and sellers have stopped carrying out supply chain analysis and mapping. You can’t analyse it until you’ve mapped it.
Almost half of respondents to the McKinsey survey said they know the location and key risks faced by their tier-one suppliers, but just two per cent can say the same about suppliers in the third tier and beyond. This is a problem because global issues like the recent semiconductor shortages often happen deeper in the supply chain.
By building trust you can increase the likelihood of tier-one all to way to tier-n suppliers sharing this information. This will improve your understanding of how everything moves, and where risk or opportunity lies. Technology such as blockchain can bring this to life, offering a clear, transparent ledger that’s ideal for driving trust.
Developing a collaborative network
Ultimately, this approach to managing risk, increasing trust, and building visibility leads to a collaborative network of suppliers. Whether or not the contractual relationship is direct or indirect, all of these suppliers are in your network as the buyer, and the need for trust is critical throughout the supply chain (or web!).
Visibility isn’t just about the who, it’s about speed of sharing information and automating that which can and should be to allow for all parties to concentrate on the relationships for the future. This is where people are critical to making strategic decisions and building meaningful relationships. The simplification and automation of processes to identify and eliminate waste and speed up those transactions is critical for a collaborative approach to begin to emerge. In fact, it’s the very beginning of trust. Sako wrote that the base level of trust is contractual trust, i.e., to keep your promises – infusing automation over the manual and routine helps to achieve this as both sides know it will be done.
Building for the future
Even with positive signs that we’re beginning to recover from the worst of the pandemic experience, supply chain disruptions aren’t going away. Building trust with trading partners will improve how you share information, identify common goals, and focus on the processes that deliver the best outcomes. By identifying risk and value at each stage, you’ll be better placed when the next unpredictable event comes along.
Gordon Donovan is Director of Market Research, Procurement, SAP.
