Supply chain: a key challenge in risk management?

The supply chain is a complex environment in which an increasing number of interdependent operators coexist. Due to the multiplication of actors, operational efficiency and responsiveness will no longer suffice to tackle operational risk. Only by identifying risks related to their procurement and distribution networks will organizations be able to ensure the steady progress of their logistics operations.

However, the very concept of risk is hard to define, as it is subjective and situational. How can an organization assess the impact of such risks? How can it minimize their effects? Purchasing and Supply Chain functions now have a great number of tools and methods at their disposal to assess and manage supply chain risk.

How to identify supply chain risk?

Risk management is a real challenge for operators. The consumers’ growing concern for the quality and origin of a product strongly influence their purchasing decision. In order to meet these requirements and to ensure the sustainability of their activities, organizations must have full control over their supply chain. To do so, they need to have a comprehensive overview of it and to implement a structured set of responsible practices adapted to each type of risk.

Supply chain teams are facing a variety of risks likely to harm the supply chain. To each of these factors correspond a number of best practices to be integrated into the company’s processes.

Internal risks

Internal risks are inherently linked to the nature of your organization, as well as to your field of activities. Therefore, you have all the means to act directly on them and eliminate the root causes.

  • Project management. Poor project management may affect the correct business conduct or relations with your suppliers. This often results from an inadequate allocation of human or physical resources. To remedy this, make sure that your project manager has precise knowledge of your supply chain and its operators.
  • Human resources. Perhaps one of the most difficult risk to anticipate, human resources are often associated with project management. An employee on sick leave, a lack of expertise or an error of judgment might compromise your production rate.

External risks

As detailed below, external risks are very diverse in nature. They stem from your work environment, the context, as well as the activities of other actors in the supply chain. Although you don’t have direct control over their causes, you can understand them and establish a set of processes to minimize their impact on your business.

Price instability

Whether we talk about inflation or volatility, sudden price variation complicate the planning of purchasing and, as a result, procurement activities. In the long run, this can threaten a company's market position.

To prevent the effects of inflation, for example, buyers should set up long-term contracts with their suppliers. By negotiating in advance on the applicable rates, they minimize their risk of financial loss. However, in doing so, companies reduce their negotiating margin and lose flexibility.

Quality

Even though there is no such thing like zero risks, some manufacturers have adopted a zero tolerance policy in terms of QA (quality assurance). And they are right to! The mere quality flaw may result in poor maintenance of your equipment, a decrease in production or even an interruption in commercializing.

Quality risk belongs both to external and internal risks. Defaults can result from products or services bought to less scrupulous suppliers, or from the production chain of the organization.

Nevertheless, manufacturers have several standard methods and quality assurance labels at their disposal, allowing them to maintain control of their value chain. As an example, we could mention the 6 Sigma (or Six Sigma) method developed by telephony giant Motorola.

The Mobility Work Hub platform allows industrial suppliers to exchange best practices with end users of their products. By offering their official catalog online, OEMs (original equipment manufacturers) and consumables manufacturers can share their technical documentation with Mobility Work CMMS users (Computerized Maintenance Management System) to improve the use of their products.

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Delivery times

Companies might struggle with three types of delivery risks, sometimes of the most common origin (meteorological, social, human...):

  • Failure or delay in delivery. Any failure to deliver can result in a slowdown or shutdown of the production line.
  • Advanced delivery times. This risk, which may seem insignificant, can lead to unexpected expenses for buyers. Just-in-time companies are seeking to optimize their profit margins by reducing their inventory costs.

In order to limit any financial losses linked to a misdelivery, companies can agree upstream with their suppliers on specific clauses in their supply contract.

Legal framework

Did you know that a buyer can be held liable for the legal mistakes of his suppliers? This is why we strongly recommend that companies raise their Purchasing teams’ and suppliers’ awareness on the legislation in force, as well as their internal regulations, before entering into a procurement contract. This aspect should never be overlooked, especially in the context of international contracts.

Reputation

If the impact of the above-mentioned factors can be measured in financial or productivity terms, it is difficult to quantify a company's reputation. However, it plays a major key role in today’s efforts to acquire and retain customers.

Companies are committed to their customers by a more or less tacit agreement. Any delay in production or quality defect will have a negative impact on the end user’s image of his partner.

On the other hand, before trying a new product or service, consumers will no longer only consider price or quality, but also the overall image of the brand. This is not only a matter of the company's legal exemplarity. Brand image is closely linked to consumer values, ethical or moral issues.

However, an organization's reputation is built not only on its own actions but also on those of its partners. It is therefore important to choose them carefully. Mobility Work is the first community-based CMMS. Its users can benefit from the community's good maintenance practices, but also from its experience with different suppliers.

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Users now have the possibility to share their contacts and create a common address book. They can comment on their experiences and share them with other members of the community.

The advantages of choosing the right partner

With the advent of new consumption patterns, the supply chain is undergoing significant changes. Buyers are moving away from traditional distribution channels to direct relationships with manufacturers. By removing this strategic link, organizations become more vulnerable to the hazards of the supply chain.

There are, in fact, many facets to suppliers risk. Some of the elements mentioned above are a direct result of poor supply activities management: delivery times, quality or even reputation. In addition to these, there are commercial risks, which are the primary concern of the Purchasing function. Their role is to reduce the risk of financial losses related, for example, to incorrect invoicing.

Another factor of growing importance is data security and protection. As a customer, you have a right of review over the use and storage of your data by your suppliers. Before entering into any procurement contract, make sure that your partner complies with the relevant standards and practices and that your data will be protected in the event of hacking.

Give yourself the means to fulfill your ambitions

Supply chain risk management will take many forms, depending on the nature of your business and your strategic direction. Your organization may be more sensitive to one risk factor than another. An appropriate risk management strategy will bring many benefits to your company.

Why should you deploy a supply chain risk management strategy?

Having a better understanding of the risks threatening your supply chain gives you a real competitive advantage. When you implement a structured set of responsible practices, you benefit from better control of your supply chain and manage your activities according to their criticality level. This way, you ensure its efficiency and flexibility, as well as the fluidity of its operations.

The centralization and rationalization of your procurement processes also contribute to the overall improvement of your production chain. You improve your productivity by reducing downtime and reduce operational costs. In addition, you strengthen your brand image through the transparency of your purchasing strategy.

How to develop your supply chain risk management strategy?

Although the development of a strategy is specific to each entity, there is nevertheless a set of good practices that will guide you in your approach:

  • Carry out a risk mapping. An essential step: the analysis of your supply chain. Before formalizing your strategy, it is essential that you have good visibility of the actors and processes of your supply chain. This will allow you to measure your level of vulnerability to each of the factors mentioned earlier and consider an adequate strategy.
  • Find the right solution. Once the risks have been identified, make sure you have the necessary methods in place to respond to any problems in your supply chain, while limiting potential losses. The ISO 28000 standard provides companies with a reference framework defining the fundamentals of the Supply Chain Security Management System (SCSM).
  • Optimize human resources. Ensure that all your employees and suppliers comply with your risk management strategy. Do not hesitate to conduct audits or offer them training.
  • Control your activities. Implement processes to regularly monitor operational, ethical and financial risks, as well as the performance of your suppliers. To do this, do not hesitate to use monitoring, communication and reporting tools, such as Mobility Work next-gen CMMS.
  • Collaborate with your suppliers. As part of your SRM strategy, keep your suppliers engaged. To do this, do not hesitate to develop privileged communication strategies and channels. To ensure the effectiveness of your relationships, you can develop supplier evaluation systems using SRM software.

Tailor your strategy to your suppliers

Regardless of their size or sector of activity, supplier risk management is a growing challenge for companies. Following the 2008 financial crisis, a large number of tier 1 (direct suppliers) and tier 2 (suppliers of suppliers) suppliers found themselves in difficulty. These events also highlighted the high dependence of companies on their suppliers.

Supplier risk management has finally become a priority for a large number of decision-makers. Given the multifaceted nature of supplier risk (financial, contractual, business, technical or CSR), the Purchasing function plays a key role in identifying and eliminating these risks. Supplier risk management is then integrated into a more global vision of the supply chain: your SRM strategy.

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Many industrial players have already successfully deployed Mobility Work CMMS to improve the management of their budgets and industrial maintenance routines. A year ago, we presented our platform Mobility Work Hub which simplifies exchanges between suppliers and industry players. Mobility Work users can thus plan, manage and monitor the actions of their suppliers or service providers.