Managing Supply Chain Risk

Peter Masonbrook
How strategic are your supply chain decisions? Are big decisions left to operational staff, or properly represented at board level?

High profile supply chain risks hit the headlines recently, with the KFC crisis amply illustrating the operational and reputational perils. Similar shortcomings were cited as one of the factors that led to Carillion’s downfall.

Effective supply chain management (SCM) provides assurance and reduces risk for a business and its clients. Yet many organisations fail to treat SCM as a discipline requiring planning, strategic development and focus, supported by senior leadership.

Senior leadership needed

80% of an organisation’s turnover rely on buying in goods and services (Chartered Institute of Procurement and Supply: Positions on Practice) but unlike HR, marketing, sales and finance, there are far less sponsors of SCM at board-level. SCM has to be taken seriously and embedded in most large organisations at this level. Its importance is often under-estimated, with strategic category decisions typically taken at operational level, handled by supply chain teams or by project managers. How often are potential risks that may arise from the supply chain discussed at board-level? Boards only tend to be involved once the risk has happened rather than focussing on mitigating the SC risk prior to the event occurring.

Avoid over-emphasis on cost savings

All too often, supply chain teams are simply asked to “get the lowest price” but not consider the true value for money aspect of acquiring goods and services. Supply chain teams in organisations have only the time to focus on operational issues of price, quality or time but without a detailed exploration of the inter-dependencies and consequences for supply chain risk. What would the mitigation strategy be if the good or services are not delivered on time if at all? What would happen if the supplier enters liquidation before the contract is honoured? The strategic consequences may not be immediately apparent, so they are not subject to rigorous risk management processes. Over-emphasis on cost savings is frequently at the expense of other supply chain risks such as response times, logistical expediency, quality and community behaviour.

Future Planning

Supply chain teams with the guidance from board-level should be looking to address long term supply chain strategic goals with suppliers. An organisation should share their 5-year plan with a supplier and look to ways on how they can collaboratively work together to meet the organisation objectives. A supplier could even simulate the client’s objectives into their long-term objectives. If a supplier knows they have a long-term commitment they will look to ways to re-invest within their business providing assurance and reducing future risk back to the client.

Strategic Supply Chain Management (SCM) should be proactive rather than reactive, properly situated in the organisation, and focused on performance and risk mitigation—cost should not be the over-riding decision.


Supplier Relationship Management

Interestingly the clients that knew about the problems with Carillion before they came into public knowledge was, in the main, the clients, that would meet with Carillion on a regular basis. An organisation that develops and builds a strong and open relationship with a supplier (rather than one that just looks to tactically buy from a supplier) will be able to identify potential risks and more importantly mitigate these risks before they happen. In the case of Carillion an organisation contracted to them could have sourced alternative players in the market, and potentially switched far quicker, incurring minimal cost and less impact on losing highly skilled resources.

Strategic Supply Chain Management

Strategic Supply Chain Management (SCM) should be proactive rather than reactive, properly situated in the organisation, and focused on performance and risk mitigation—cost should not be the over-riding decision. So why does SCM need to be strategic? Well, one good reason is to support the organisations strategy, however more importantly supply chain strategy also focuses on maximising efficiencies and gaining the most from the supplier by ensuring they align their strategy to the organisations strategy. By supporting a clear Supplier Relationship Management Plan (SRMP), the organisation keeps sight of the strategy and is able to plan tactical steps to reduce risk with the collaborative support of each individual supplier. Another reason for having a SRMP is to establish how you work with your supply chain partners, your internal stakeholders and external customers. As the marketplace becomes more uncertain, it is critical to strategically reinforce and closely develop existing supplier relationships.

Managing supply chain risk

Faithful+Gould has excellent experience in the management of supply chain relationships. We have a wide range of tools and best practices at our disposal, and can support clients seeking to reduce their exposure to supply chain risks. Our approach seeks to implement key measures that reduce risks associated with supply chain failure. At the same time, we look at ways to ensure superior supplier community performance. 

Written by