5 Ways to Mitigate Supplier Risk in 2021
By Hugo Britt | November 10, 2020
The 2020 COVID-19 crisis put supply chains and supplier relationships to the test. It provided a jarring wake-up call for procurement and supply managers who had glibly boasted of the strength of their supply networks.
Suddenly, organizations discovered their supplier relationships weren’t as strong as they assumed. This was particularly true in terms of being considered a priority customer for high-demand items such as PPE.
Likewise, many of the concepts the profession likes to throw around – agile, nimble, resilient – proved to be not much more than buzzwords when a major black-swan event came along.
How to mitigate supplier risk in 2021
As 2021 approaches, it’s time to take stock of the lessons learned this tumultuous year and put them into practice. Here are some tips on how to mitigate supplier risk in the year ahead.
Prioritize risk mitigation in procurement decision-making
Every procurement decision involves walking the tight-rope between cost and risk. Usually, it’s driven by the overall goals of the business. Is the CEO seeking to cut costs, or protect the brand? Perhaps procurement only manages a handful of high-risk categories, while most of your sourcing activity involves little or no risk of disruption.
This year, the balance has shifted. After an initial flurry of cost-cutting as organizations went into survival mode, there is a recognition (for now, at least) that risk mitigation must take priority over cost-cutting. Put bluntly, organizations can’t afford another major shock, particularly during a recession.
In practice, this means prioritizing continuity of supply over lowest cost, diversifying rather than consolidating the supply base, and having a Plan B in the case of disruption to critical goods and services.
Make a plan
It’s impossible to plan for every specific scenario. It is, however, possible to make a general plan for certain events, like the supply of a business-critical item being disrupted. It’s also a crucial step towards mitigating supplier risk.
First, take the time to create a map of the most likely risk scenarios for your unique supply chain. Then, write a plan for each one and ensure they’re made accessible so they can be found fast when disaster strikes.
A plan doesn’t necessarily need to be detailed. It might simply lay out a series of common-sense steps to take, leaving the details to be filled in according to circumstances. Importantly, it should nominate who will be in charge, and name a cross-functional taskforce for the emergency. And finally, keep this list updated as staff will come and go.
Having a plan – even a very simple one – will immediately put you days, if not weeks, ahead of the competition if disruption hits. Every day counts in terms of the financial impact on the business, after all. When other organizations are going through the process of figuring out their initial steps and choosing a taskforce, your organization can simply take its ready-to-go plan off the shelf, update it, and get to work.
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Shift from a Just-in-Time (JIT) to a Just-in-Case (JIC) supply chain
Lean supply chains are ideal when everything is functioning smoothly, but they’re admittedly risky. A just-in-time approach involves only purchasing what you need and keeping the absolute minimum amount of goods in stock to minimize warehousing costs. As a result, JIT prioritizes cost and efficiency.
As you may have guessed, a just-in-case approach prioritizes risk. Warehouses are kept full to insure against the likelihood of a major supply disruption. Similarly, a business may keep months of critical stock to ensure business continuity even if a supply chain collapses. For manufacturers, this means production can continue until supply managers have a chance to deal with the crisis.
Of course, JIC is more expensive in terms of warehousing and other costs, but that’s what insurance is all about.
Strengthen strategic supplier relationships
You may have thought you had a great relationship with your strategic suppliers, but did they prioritize your organization when supplies became limited? Or, did they choose to do business only with their very biggest customers, cutting you out of consideration?
There simply isn’t time to develop strong relationships with every major supplier. This is why it’s a crucial first step to segment suppliers and concentrate your efforts on the top 20%. As discussed above, this decision should be based more on risk rather than spend.
Keep in mind that supply shortages are usually based on the nature of the crisis. For example, only organizations that were previously sourcing PPE would have had great relationships with PPE manufacturers before the crisis hit. You simply can’t plan for everything, but you can identify and protect the supply of products that are critical to your operations.
Have this conversation with your strategic suppliers. Ask them directly what it would take for them to prioritize you in the event of a future disruption, and act accordingly. Writing for Forbes, Serenity Gibbons recommends addressing challenges and concerns upfront and taking simple steps to strengthen the relationship such as paying your suppliers on-time, every time.
If the answer is that your organization simply doesn’t purchase enough to be a priority customer, the solution is to join a GPO.
Join a Group Purchasing Organization
The reality is that the biggest players receive priority when supply is limited. One of the best strategies to reduce supplier risk in 2021, therefore, is to ramp up your purchasing power by joining a GPO.
Being part of a GPO not only means you will receive a share of the limited supplies but will get a better price than you would have been able to negotiate on your own. Through the power of bulk purchasing, you could save an average of 22% across several categories.
And because every day counts during a crisis, being part of a GPO will dramatically speed up time-to-source by skipping the lengthy RFP process. Supplier relationships are already established, and supplier contracts are ready-to-go.
In early 2021, it’s time to prioritize risk. When the COVID-19 crisis is in the past and the economy bounces back there will be an opportunity to refocus on cost and other factors. For now, though, procurement and supply managers must consider every single decision they make through the lens of risk mitigation.
Need more insight on how to mitigate supplier risk next year? Get in touch with Una to arrange a discussion about how membership in a Group Purchasing Organization can help you reduce supply-chain risk.