Beyond supplier management: taking meaningful supply resilience out of the too-hard basket

Supply risk is the Achilles’ heel for businesses. It doesn’t need to be.

Business leaders rank supply chain risk as high as they do a pandemic or a cybersecurity breach. No other risk ranks higher, according to new research from specialist insurer Beasley.

More importantly, unlike the threat of a pandemic or a cyber breach, executives also believe their businesses have much less resilience when faced with supply risks.

For many, supply resilience is in the too-hard basket, largely because they don’t know where to begin. It is up there with war and climate change, which are also characterised as risks that executives believe their businesses are less likely to recover from, should these materialise.

The research begs the question: why has supply risk not stiffened the pillows of the nation’s C-suite?

Yes, the pandemic has shown us that we need to act on an area of risk that could, quite frankly, wipe out many businesses, yet few have done little more than escape inertia. Perhaps, compliance with regulatory standards that represent the minimum possible level of effort, provides a false sense of security?

Perhaps, and more likely, many companies just don’t know how to effectively approach this issue. We all see that there are risks, but knowing exactly what to do about them, given the complexities involved, is another matter.

Turn risk into a competitive advantage

By contrast, a company that has a mature understanding of supply risks is more able to use it to its advantage. The first advantage is a more resilient business. One that can outperform rivals in the event of disruptions. Further, more effective and robust supply chain management can result in greater flexibility and responsiveness for the whole business. Experience shows that customer retention and new customer acquisition, both improve as supply resilience improves. In uncertain times, it allows organisations to deliver more consistently to customer expectations.

So, perhaps, it is time to recalibrate and just treat supply resilience on a practical level. A more useful approach requires a common-sense set of tasks.

First, we need to identify the major risks our supply chain is exposed to today. And ‘today’ is important, as this analysis must always be contemporaneous and updated on a routine basis. You can start by taking a product or service and walk backwards, identifying each point at which another party is critically involved in the development of that product or service. At each stage, you need to consider the operating environment of that party and the threats that might present.

It is important to make the distinction that while we are identifying risks, our principal concern is not with the supplier per se, but rather with a bigger question: what could happen at this point in the supply chain? As soon as we start to spell out what could happen, we start to gain an appreciation of the real dimensions of risks.

And we can gain a better sense of risks by assessing three dimensions: probability and how it can be reduced; severity and how that can be reduced; and detectability and how it can be improved. Detectability is possibly the most overlooked dimension because it allows early identification of emerging threats and activation of contingency plans in a manner unavailable to supply chains without systematic detectability.

Always remember that our analysis must be more interested in the supply chain than any given supplier. We need to be open-minded about the many sources of risk and be objective and dispassionate in the way we look at risk mitigations in addition to supplier management. Having our focus on the supply chain itself means we are more likely to accurately evaluate the risks any one supplier, and their position in the supply chain, might represent.

Scenarios bring risk to life

Finally, one of the best tools for developing responses for an unknowable number of possible futures is to run scenarios. Overlaying your organisation’s supply chain with several broad environmental threats that could emerge, provides invaluable insight into how your supply chain will respond – and more importantly, how it can be systemically strengthened. What if there is a pandemic? What if shipping lanes are blocked? What if trade sanctions are placed on a third country that halves the global production capacity of a critical input? Add a little imagination to your near-to-middle-future horizon, and you’ll find scenarios can be brought to life fairly readily. You can then wargame the scenarios to think through what you can do about the probability, severity, and detectability of the threats the scenario revealed.

But make no mistake, as much as you are wargaming, it is not a game. There is no doubt there are many serious thinkers in the Treasury and Department of Health who will be wishing contingency planning for the pandemic was a lot more thorough and real-world than it was in 2019. Once you have these scenarios, keep them current and keep them real.

At the same time, there are more and more boards and company directors that want to see proactive management of supply resilience, especially as it increasingly seems to correlate with improved market capitalisation. The insurance industry is also applying more pressure to see these ‘uninsurable risks’ are better understood and responded to. The trends are clear.

Today, targeting only supplier management does not drive sustainable competitive advantage. Today, if you’re a C-suite executive, you should be demanding nothing less than a fully informed, highly practical assessment, and create a plan that is purpose-built for the risks your company faces.