It’s impossible to plan for every specific risk scenario. Follow these common-sense tips to mitigate supplier risk before the next supply chain disruption takes place.
There’s probably one in your neighborhood: a well-equipped bunker, stocked to the brim with non-perishable supplies, survival gear, and enough firepower to fend off a horde of zombies.
Welcome to the world of doomsday preppers - those enthusiastic individuals who are ready for anything from a natural disaster to an all-out apocalypse. They’ve got dehydrated meals, water purification systems, and a collection of weapons that would make a superhero jealous.
Are preppers over-reacting, or are they the ultimate examples of risk management in practice?
How to Mitigate Supplier Risk
Dealing with risk is a natural part of running a business, and supply management is an inherently risky exercise. But does this mean we should encourage every procurement team to transform into the business equivalent of doomsday preppers, meticulously hoarding resources and contingency plans?
Or is there a smarter, more reasoned approach to risk mitigation in procurement?
The Risk Mitigation Tight-Rope 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.
After the supply shocks at the beginning of this decade, there is a growing argument in many organizations that risk mitigation should take priority over cost-cutting. Put bluntly, most CEOs know they can’t afford a major supply shock.
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 task force 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.
Shift From a JIT to a 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. A bit like a doomsday prepper’s bunker, 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 – think of these as the costs of risk mitigation.
Strengthen Strategic Supplier Relationships
You may have thought you had a great relationship with your strategic suppliers, but will they prioritize your organization when supplies become limited? Or, will 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. 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. Address challenges and concerns upfront, and take simple steps to strengthen the relationship such as paying your suppliers on-time, every time.
Join a Group Purchasing Organization
If the answer is that your organization simply doesn’t purchase enough to be a priority customer, one solution is to join a GPO.
The reality is that the biggest players receive priority when supply is limited. One of the best strategies to reduce supplier risk, 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 limited supplies during a disruption, 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.
Need more insight on how to mitigate supplier risk? Get in touch with Una to arrange a discussion about how membership in a Group Purchasing Organization can help you reduce supply-chain risk.
