As supply chains become ever more complex and interconnected, companies are in danger of spinning an intricate ‘supply web’ that could leave them trapped by unexpected events and risks.
The financial impact of poor supply chain management was recently brought home by a Thomson Reuters survey in which 47% of respondents said their business had lost revenues as a result.
In light of this, it’s revealing that 35% of firms also said they considered their supply chain to be very complex.
Globalization and greater use of technology has extended supply chains to such an extent that an interconnected ‘supply web’ might now be a more accurate description for many firms.
The problem with these supply webs is that more and more unexpected things are able to happen, such as cost fluctuations, supply disruptions and hidden risks with suppliers.
We look at some of the biggest dangers and how to mitigate these risks.
Price volatility and disruption are seen as major supply chain risks due to the potential to have a major financial impact on the business.
In the Thomson Reuters survey, 43% identified raw material price volatility as the biggest risk to their organization’s supply chain in the past 12 months.
Hedging is an option to minimize pricing volatility.
However, it comes with its own challenges such as difficulty in tracking forward pricing and the need for sophisticated analysis.
Modeling can also help supply chain professionals better understand and anticipate price volatility, but it requires refined technology and deep market knowledge.
The best option is to work with companies that already offer this type of research and forecasting service.
There are a wide range of potential supply disruptions that can happen when working with a large web of suppliers, including extreme weather, geopolitical upheaval and unexpected events.
On August 12, 2015, chemical blasts at Tianjin, the 10th busiest port in the world, killed 165 people and destroyed more than 300 buildings and around 20,000 finished vehicles and containers.
Insurance payouts from the blasts totalled up to US$3.5 billion, making it the largest ever man-made loss in Asia. A number of Original Equipment Manufacturers were affected by the explosion, including Jaguar Land Rover, Toyota and Ford.
Given that unexpected events can affect the largest organizations, the need for transparency and information around potential disruptions is essential.
Supply transparency aligned with capabilities to manage price volatility and monitor supplier risk all on a single platform can provide a holistic solution to clients.
Not only this, but due diligence combined with careful monitoring to feed big data into risk management tools is necessary, as this will allow supply chain management professionals to relay the information to senior executives in various necessary departments such as procurement, operations, compliance and legal.
Spreading out one’s suppliers and creating diversity within the supply chain might seem like a plausible solution to mitigate risk.
However, organizations are now being held accountable for the actions of their suppliers sometimes deep down within the supply chain and need to mitigate these risks to avoid reputational and regulatory damage.
There are a few key regulations that are affecting the entire corporate landscape, including the U.S. Foreign Corrupt Practices Act (FCPA), UK Bribery Act, Dodd-Frank Section 1502 (Conflict Minerals Act) and the UK Modern Slavery Act, all of which aim to stamp out bribery and corruption and illegal activities in supply chains.
For example, the FCPA prohibits companies from using bribery to win new business, and the FCPA is enforced by the Department of Justice and it cannot be taken lightly.
How to mitigate risk
Firms are aware that they need to better understand and monitor their supplier base to lower supply chain risk, but a quarter of these firms aren’t taking any action to meet these needs.
One of the reasons for this is that it’s hard for a single function to do so alone and another is that too often they are having to do so manually .
Successful due diligence requires effective technology and that’s where a compatible risk management solution can help ease burdens.
Thomson Reuters offers a range of intelligent price, disruption, and third-party risk solutions, such as data and technology, that can help minimize the uncertainty in your supply chain.
Events such as volatile commodities prices, extreme weather, and bribery and corruption can disrupt and have a negative impact on your supply chain.