Contingency Planning for the Supply Chain

The importance of risk mitigation and contingency planning for the supply chain is as prevalent as ever thanks to ongoing disruptions.

By Hugo Britt | March 14, 2024

Search

If the past two years have taught us anything, it’s the importance of risk mitigation and contingency planning for the supply chain. So much has happened:

  • The Israel-Gaza conflict is also impacting oil prices, with the threat of the conflict spreading to other countries making supply chain professionals nervous. Rising oil prices do more than increase the price at the gas bowser – everything that relies on global shipping (food, consumer goods) becomes more expensive.
  • Modern-day pirates – Houthi Rebels – have targeted commercial shipping in the Red Sea, diverting shipping away from the Suez Canal and around the much longer African route. There’s also talk of a resurgence in Somali piracy.
  • Massive drought in Panama has forced authorities to reduce shipping through the Panama Canal (which relies on water from the nearby Gatun lake) to reduce daily usage of the route by 40% compared with 2023.
  • Continuing tension and uncertainty with China has led to a “great reshuffling” of global supply chains, with Mexico now the number one trading partner with the US. With direct-to-China sourcing declining, supply chains are getting longer, more complex, and more expensive.  

Given the stressful environmental and political climates, there are four main areas to consider when developing contingency plans for the supply chain.

Four things to consider when it comes to contingency planning for the supply chain

When it comes to future-proofing your organization’s supply chain via robust contingency planning, here are four important factors to consider.

1. Supplier Risk

No two vendors will be exposed to the same risk factors, which is why it’s important to conduct thorough risk assessments for all “mission-critical” suppliers and interrogate their risk mitigation strategies. 

For example, suppliers in certain locations are more vulnerable to being impacted by a natural disaster – which would halt production and cause delays – while others are more susceptible to the risk of modern slavery.

Once you understand the kind of disruption a supplier is most likely to face, you can work with them to mitigate that risk or identify alternate suppliers. For example, if you’re concerned that newly proposed tariffs will make it too expensive to buy a critical product component from your supplier in China, you can start making alternate sourcing arrangements.

Implementing a preferred supplier program for your most critical suppliers is a good way to ensure loyalty, reliability, and high-quality service. You’ll build meaningful relationships and work closely with all vendors in this program to plan for everything from product shortages to changes in customer demand.

2. Inventory

The first thing to fail following a major supply chain disruption is your organization’s inventory levels. Do you know how much stock you have, where it is, and how long it would last you in the event of shipping delays, border closures, or product shortages? 

It’s important to consider how you could ramp up or scale-down production as required. What would you do if consumer demand suddenly skyrocketed and you require a 100% increase on a critical component? Novo Nordisk, for example, recently spent $16.5 billion on boosting its pharmaceutical manufacturing capabilities after rocketing demand for the obesity drug, Wegovy.

Conversely, you don’t want to keep your inventory levels too high in case consumer interest wanes and you’re lumbered with a whole load of expensive and unsellable stock.

In a post-pandemic world, most procurement teams are erring on the side of caution, which means shifting from a just-in-time (JIT) to a just-in-case (JIC) supply chain model. This means having more inventory within close reach and outside high-risk areas.

If your organization has more limited resources, storing excess inventory might not be possible and it’s all the more important to consider alternative options such as near-shoring or re-shoring critical manufacturing processes. Another option is investing in 3D-printing for certain critical product components.

3. Contracts

It is of the utmost importance that everything agreed upon during the negotiation phase between buyer and supply is put into writing. This includes everything from outlining expectations for both parties to clauses that will protect your organization in the event of a major supply chain disruption.

Work closely through all documents with your organization’s legal team to be sure that you understand exactly what you are committing to, and have addressed all possible eventualities. 

For example, what happens if you or a supplier can no longer fulfill their duties? What conditions will trigger a force majeure? You’ll also need to consider how to fairly assign risk to both parties so neither one feels exploited.

Once you have robust contracts in place, it’s worth carrying out regular contract audits to hold vendors accountable and identify any instances of non-compliance. This can reduce financial risk and make it easier to identify problems before they worsen and cause significant disruption to the supply chain.

In this atmosphere of vastly heightened risk, supply chain professionals are doubling their focus on supply chain visibility to mitigate the impact of disruption.

4. Logistics Visibility

Houthi attacks on shipping has effectively closed the Suez Canal, which handles 10 to 15% of the world’s oil trade. The Washington Post found that “sending a ship through the canal will now cost $3 million to $5 million, including higher insurance charges, security and danger pay for the crew. Diverting around southern Africa’s Cape of Good Hope — which adds seven to nine days to the trip from Asia — could cost $2 million for the same type of ship.”

Since the outbreak of fighting in the Middle East, the cost of shipping a standard container from China to Europe has soared to more than $4,700 from less than $1,000. This is hurting even the biggest multinational shippers. Maersk, for example, saw its profits slump from $8.9 billion to $521 million during the December quarter year-on-year. Quarterly revenue fell by nearly half, and the shipping giant trimmed its workforce by 7,000 people and plans an additional 3,500 job cuts in 2024.

Heightened risk & vulnerability

In this atmosphere of vastly heightened risk, supply chain professionals are doubling their focus on supply chain visibility to mitigate the impact of disruption. 

To boost visibility, you need to acquire and analyze a lot of current and historical data, including the size of your fleet, the volume of stock being shipped, where that stock will be at any given time, warehousing and shipping costs, shipping routes, travel times, delivery days, and border requirements and regulations to identify the most high-risk areas within your supply chain and any inefficient processes.

This process can help you to make data-driven supply management decisions. For example, you may choose to lease or rent additional vehicles, change your delivery days to drive efficiencies, or avoid certain ports. If you find your existing processes to be efficient and effective, it’s still important to plan for potential disruptions and consider alternate shipping routes. Today, there is a multitude of supply chain technologies available that can troubleshoot various disruptive scenarios and plan alternate optimal routes.

Need access to more contracts, assistance improving procurement efficiency, or mitigating risk? Una can help. Download our playbook to learn more:

How to Manage Risk

Share on Social

Facebook
Twitter
LinkedIn

You might also like:

Subscribe to our Newsletter