Expecting the unexpected

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Achilles – Business Reporter Client

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How data helps organizations build reliable and resilient supply chains and manage unforeseen risks

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The Suez Canal lockdown, the war in Ukraine, the pandemic, Hurricane Ida and the shortage of truck drivers: over the past two years, businesses of all kinds have experienced major disruptions in their supply chains. And this violation seems continuous and unceasing.

All organizations depend on third parties to provide them with goods and services. When supplies are unstable, this dependency on suppliers poses a significant risk to operational efficiency and profitability.

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Using the wrong vendors can lead to reputational risks such as allegations of benefits from modern slavery. There are also operational risks such as privacy breaches when suppliers are used by hackers to steal customer data. And there are financial risks such as Loss of $200 billion in revenue automotive industry due to a shortage of computer chips during 2021.

Supply chain risk is damaging. It is also very difficult. A single finished product can include dozens or even hundreds of suppliers, and most organizations have multiple supply chains. This makes supply chain risk management a very challenging task: identifying and mitigating even major risks in the most critical supply chains requires significant time and talent. But above all, supply chain risk management requires data.

Known risk management

Running a business involves risk. Often these risks are well known, such as production bottlenecks or supplier failures. Many of these “holiday” risks can be mitigated by choosing the right vendors.

To do this, organizations need enough data about potential suppliers so that they can understand the risks. Almost all of these risks are related in one way or another to environmental, social and governance criteria (ESG), which are becoming increasingly important for businesses around the world. Therefore, data on these risks is especially important.

ESG is more than just sustainability. This has a real impact on the operational and financial flexibility and resilience of organizations. There are five main pillars to consider:

  • Environmental: the impact of the business and its suppliers on environmental issues, including pollution, climate change and resource scarcity
  • Social: implications for society at large, such as human rights (including slavery) and justice (including bribery)
  • Health and safety: impact on the physical, mental and financial well-being of employees and operational partners such as contractors
  • Control: the extent to which standards and regulations are followed, sound management systems are in place, and business ethics are adhered to
  • Financial: the overall financial security of a business and its impact on how ESG considerations are considered

These are all important areas. Suppliers and potential suppliers need to be compared against them to provide an accurate and comprehensive view of the risks each poses.

The importance of having the right ESG data was demonstrated when Achilles supply chain risk management experts helped a leading renewable energy company avoid working with a high-risk supplier. Through a detailed and validated data collection process, Achilles determined that this supplier’s workplace injury rate was 25 times higher than the industry average. Collaboration can significantly increase the risk of an on-site accident—a significant operational and financial risk.

In the same project, Achilles also found that many of the existing suppliers did not have policies in place to prevent modern slavery. This posed a high risk for the energy company, as it would for any organization based in the UK, Germany or Norway, where due diligence is required by law to eradicate modern-day slavery in supply chains.

You can significantly reduce the risk of downtime by collecting and analyzing data about companies in the supply chain. However, risk reduction can only go so far because you don’t always know what the risks are. Thus, in addition to having processes to manage known supply chain risks, processes are also needed to respond to unexpected risks.

Managing Unexpected Risks

With the right preparation, managing even unexpected risks becomes possible. Managing these “reactive” risks requires the organization to identify the most important processes and strengthen them.

For example, in any business-critical process, key vendors need to be identified and alternatives identified. Initial negotiations may then take place that will put the client organization in a better position if it has to switch to an alternative supplier, and the results may include preliminary supply contracts or secondary supply contracts with the possibility of increasing the quantity in a short time. An alternative could be to simplify or shorten the supply chain, perhaps by combining some elements and combining others.

Both options can increase costs. But like insurance, they are also a way to reduce risk. The amount of risk (and cost) you are willing to accept is a business decision, not a purely financial one.

The key consideration here is that organizations must manage reactive risk before they need to respond—to the point of failure. Once the violation has occurred, it will be much more difficult to do anything about it. For example, finding and agreeing on a new source of important raw materials takes time. You need to be proactive if you are going to buy damaged raw materials at a reasonable price and everyone else is trying to do the same.

Data driven risk management

To manage both dormant risk and reactive risk, it is essential to have the right data. And while organizations typically collect a lot of data about their suppliers, that data isn’t always of the right type or in the right format.

For example, different teams in the procurement process may request the same information, say, about quality management. This upsets not only the supplier. This can result in data being sent in various formats that are difficult to parse. Two teams answering the question “What is your quality management process?” very different descriptions may appear, containing a lot of irrelevant information.

It is preferable to use simpler closed and semi-closed questions such as “Do you have a quality management process?” and “Does your quality management process meet the standard, and if so, to what?”. They are easier to test and analyze.

Data-driven risk management requires reliable data that can be compared, quantified, and collected consistently and in a timely manner. And once you have that data, you can use it to inform supply chain decisions that mitigate risk, plan for potential problems, and minimize their impact.

Formation of holistic thinking

Business leaders need to have a holistic view of their business, including the supply chain. Procurement is closely linked to strategic issues such as compliance and the ability to attract investment and talent. Because of this, the supply chain is as much a problem for top managers as the financial success of a business. To do this, leaders must have access to data, which is an important tool for supply chain risk management.

Business leaders must also ensure that purchasing professionals have access to the data they need to identify supply chain risks. Finding and analyzing relevant data across the business – HR, IT, marketing, operations – will be essential if purchasing departments are to do their jobs effectively.

Achilles works with organizations and their suppliers to reduce supply chain risks. Achilles Supply Chain Sustainability Index measures key supply chain risks and provides insight into trends affecting supply chains around the world.

Originally posted on business reporter

Credit: www.independent.co.uk /

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