Supply shortages and cost increases are the bane of procurement leaders’ lives right now. The COVID-19 pandemic has unleashed a wave of disruption that has constrained the availability of everything from semiconductors to shrimp, pushing up prices for these and many other items.
The ripple effects along interconnected supply chains are there for all to see. Here in the UK, the news media’s attention during the past week has been on long queues outside petrol (gas) stations – the result of too few truck drivers – and a looming shortage of carbon dioxide — the result of two big fertilizer plants being shuttered, which in turn was the result of soaring wholesale gas prices. (A friend who works in the CO2 industry advises that if you plan to drink gin and tonic this Christmas time, you’d be wise to start building your inventory of tonic water now!)
What can be done to dampen the effects of these ongoing supply shortages? My colleagues Joel Knox and Miguel Cossio recently published a compendium of ideas for the short to medium term. These ranged from steering customers to available product configurations to collaborating with suppliers to find workarounds and alternatives. (Gartner clients can access the research here.)
While crisis management and response continue to be the order of the day, longer term there’s a need for CPOs and their organizations to do a better, more proactive job of managing supplier and supply chain risk. This requires a balanced approach to sourcing strategy and network design, rather than the relentless drive for cost efficiency and supplier consolidation that have dominated the globalization era.
At our EMEA Supply Chain Symposium event earlier this month, I noted, first, that 87% of sourcing and procurement leaders told us their supply chains needed to be more resilient in the next two years. And second, that the two top strategies practitioners tell us they are investing in to achieve this — collaboration with external partners and multisourcing — are on the supply side. (My presentation will be repeated at the upcoming Americas edition in late October if you want to catch it.)
To play their vital part in boosting supply chain resilience, I recommended five key actions that procurement organizations should take:
- Map critical supply chains at a multitier level. The lack of subtier visibility beyond direct Tier-1 suppliers is a weakness for many sourcing and procurement organizations today. To ensure that dual and multisourcing activities really do help to enhance resilience, organizations need to understand more about how their most critical supply chains are configured, and the dependencies between key supply partners at different levels. Without this information, they may find that during a supplier risk event what they assumed were genuine supply alternatives turn out to be an illusion.
- Target high-impact sources of risk exposure. Most organizations can’t conceivably identify, assess and mitigate all risks across all of their supply base. So they need to prioritize where to focus their limited resources and resilience investment budgets. Defining the value at risk (or VaR) associated with suppliers is one approach for doing this. This starts by utilizing existing segmentation models to define whether a supplier is strategic, critical or transactional. It then considers the supplier’s role in supporting long-term growth and profitability, the revenue streams dependent on the products it supplies, and the complexity involved in replacing it. Lastly, we look at whether the supplier is single, sole or multisourced.
- Stress-test potential points of failure for resilience and business continuity. The notion of “stress testing” is a concept that business leaders, regulators and investors are familiar with, because it’s been used for more than a decade in sectors such as the banking industry. A stress test for direct material supply chains involves risk analysis and scenario planning of disruptive events using leading indicators such as the presence of alternative qualified suppliers and our ability to flex production between different sites. Supplier business continuity plans (BCPs) also need to be actively stress-tested, rather than treated in a checkbox, compliance-orientated way, as they have been in many companies prior to the pandemic.
- Partner with key suppliers to manage risk and assure supply. There are two aspects to this: First, positioning your company as a “customer of choice” for strategically important suppliers to ensure you get priority when capacity, raw materials and components are in short supply, as they are in many cases right now. Second, working in partnership with key suppliers to reduce risk exposure and mitigate the highest risks together. This is essential, since effective supply chain resilience often means operating across an ecosystem, not just at the level of a single enterprise.
- Invest in risk tools and technologies to monitor and anticipate disruptive events earlier. Proactive, robust and dynamic risk management across complex global supply chains cannot be done using Excel spreadsheets alone. In our Future of Supply Chain study, 70% of sourcing and procurement executives said their organizations are investing in supply chain visibility and mapping technologies. Almost the same proportion want technology that helps them to monitor supply chain risks and disruptive events across their extended networks. There has probably never been a better opportunity to make a compelling case for funding here, and in emerging areas such as predictive risk analytics. So if you haven’t already seized it, now is the time to act.
Vice President Analyst
Gartner Supply Chain