Time to move beyond supplier risk?

Why are so many organizations “surprised” when they find out that their supply chain had become a victim of the latest disruptive event?   I’m not referring to just those who manufacture the product but rather to all those that depend on it; customers or patients, suppliers & distributors, producers, and yes, even competitors.   Recently, hospitals experienced an IV saline bags shortage and Newell’s  Rubbermaid brand experienced a shortage of resin.

Why the surprised?  After all, haven’t most organizations invested in supplier (3^rd party, vendor) risk management programs and technologies.   In my last blog, we even discussed the maturing process of the supplier risk product market.  So why are organizations and customers/patients still experiencing major shortages and supply chain disruptions?

They say a picture is worth many words, so I’ll try to set the stage for the following illustration.

As you can see, the scope of what risk in the supply chain is actually being managed is part of the issue.  The scope narrows further when you consider that only a portion of the suppliers, the ones considered the highest risk to the organization, are actually being actively monitored and managed.  If you rely on property-based supply chain risk assessments than the scope is typically limited to just your property, plant, equipment, and maybe inventory (it may include suppliers and your loss of revenue if you have contingent business or time element coverage – consult your broker).   The business interruption insurance may be limited as well, to a narrow set of events such as fire, rising water, and other similar hazards.

What’s needed?

The scope of what should be considered begins with an understanding of industry economics and your organization’s role in creating value.  It’s important to first understand the broader industry value chain for your “franchise” products.  When a disruptive event occurs this understanding will simplify your understanding of market dynamics amongst buyers (customers, patients, wholesalers), producers, suppliers, and competitors.   How will demand change?  Will you be subject to displacement exposure such as when IV saline bags moved from Puerto Rico to Mexico?  Once you understand the industry value chain and forces you will then need to look to your business units/divisions to uncover the “franchise” products or services and the associated activities that create and deliver value to the market.   I suggest a little bit of research and discussions with executives to identify the “franchise” products or services and the measure to use.   The goal is to reveal whether the economic priorities such as revenue, margin, liquidity/cash, innovation/growth, etc.  At the end of the day, it’s all about profitability but the reality is the organization’s incentives will drive the behaviors.

Now you have the target, i.e. what matters most.  You can then move on to the critical activities that support the “franchise” products or services.  The supply chain encompasses many of these activities but the important element here is to highlight the activities that create your distinguishable or unique value.   By doing so, you establish the operational priority and associated financials.  Eventually this will get you to the allocation but more importantly, this framework provides a holistic view of the most critical supply chains.  Remember – if you’ve seen one supply chain, you’ve seen one supply chain.

You are now ready to map the extended supply chain for what matters most (from an economic perspective).  The mapping should not only look far beyond the 1^st tier up and downstream but also should like at critical resources such as labor and skills; technology, processing and data; physical assets; and relationships.    This might sound like a bit of work but remember, this is your franchise and the leaders pay attention to what matters most.  Also, it’s important to do your homework and talk with others in the financial planning, process improvement, risk & insurance management and other areas.  Much of the data and profile most likely exist.

Once you have the map you can then analyze the importance and contribution of the individual node in that particular supply chain, assess and measure the risk, identify mitigation and financing options, model a risk-return on investment, gain support for the investment, deploy the solution, monitor and report on it, drive towards continuous improvement.   That’s a mouth or a mindful so I plan to break down some of these elements in future blogs.  However, you can get a jumpstart by picking up a copy or image of the book, “Single Point of Failure:  The Ten Essential Laws of Supply Chain Risk” or references on my website.