Supply Chains are Adversely Affected by Global Complexity

Stephen DeAngelis

September 21, 2015

“A study of cross-industry supply chain executives by Barloworld Supply Chain Software (Barloworld SCS), found 83 per cent of respondents reported average or poor business performance,” reports Marino Donati. “Around 60 per cent said this was mainly due to the number of partners in the supply chain, the risks this creates, and the resultant limit to their flexibility. Barloworld SCS said the strategies to mitigate the risks and costs associated with globalisation centred around collaboration, visibility and performance management capabilities.”[1] With an astounding 83% of respondents reporting that globalization negatively affects business performance (or, as Donati put it, “supply chains are being held back by the effects of globalisation”), one can only wonder why alternatives are not more vigorously pursued. There are good reasons that companies maintain global supply chains (such as: customer base, cheaper wages, natural resources, supplier availability, and so forth), and alternatives to many of those factors aren’t available. That means, of course, that companies with global supply chains must do the best they can with the cards they’ve been dealt. Nevertheless, the lengthier the supply chain becomes the greater the complexity and the larger the risks with which companies must deal. As J. Paul Dittmann, Ph.D. Executive Director of the Global Supply Chain institute University of Tennessee, states, “Risk is a fact of life for the supply chain professional due to innumerable forces subject to change or beyond control within the supply chain such as legal, security, regulatory and environmental compliance; weather and natural disasters; and terrorism.”[2] Christian Lanng (@christianlanng), CEO of Tradeshift, writes, “There are three major factors that impact supply chain risk: increasing supply chain complexity, decreasing access to information and greater need for higher quality — all for a lower cost.”[3] He continues:

“Globalisation has forced countries and companies to become more efficient, creating the infrastructure and competitive advantage necessary to survive the early rounds of a brawl that will undoubtedly go beyond the last bell. Globalisation has also dramatically changed how manufacturers operate. They can now reach new customers in new markets, but at the same time expose them to greater competition. Meanwhile, raw materials, human capital, and supplier relationships must now be managed on a global scale.”

Face it. The situation, if not daunting, is at the very least challenging. According to Lanng, the key to mitigating risk is better supply chain visibility. “Enterprises need to increase visibility into their own operations and those of their suppliers,” he writes. “They also need to gather a complete risk picture and uncover potential red flags.” Jason Busch (@jasondbusch), founder and Managing Director of Azul Partners, agrees with Lanng that visibility is the key to improved performance and he offers ten tips on how your company can implement a global supply chain risk management (SCRM) program.[4][5] They are:

1. Start to engage with solution providers – Try them out, start to inflict the pain of visibility on your internal stakeholders, teach your organization to act with many blinders removed and adopt a more strategic level of thinking.

2. Solutions are in a state of flux – Early adopters will likely have to go through radical changes in their programs as this industry matures, but this is preferable to remaining on the sidelines, getting stuck deeper in the old ways.

3. Heuristics will make a big difference over time – Both in helping to eliminate false positives and also in identifying real issues with greater precision. Aggregated metadata from your third parties, combined with other big data sets, all processed in real time, will drive a change toward solutions that not only show what your supply base looks like but also helps manage risk scenarios and develop mitigation plans of action.

4. A picture is worth a 1,000 conference calls – Think of a map, showing all your major internal and external business relationships (manufacturing facilities, warehouses and distribution facilities, logistical paths, suppliers and their suppliers, etc.). This simple illustration can quickly rally stakeholders around a common cause.

5. Good SCRM analysis requires good data – Don’t skimp on the prep work. You know that sooner or later you do need to get to a clean master data management understanding, as well as item level PO analysis. You also need to fully assess your key suppliers and their immediate supply base and product lifecycles. This is a good time to start on that journey.

6. Thinking about interoperability and integration not just from a systems perspective, but from a process and timing one as well. Ask yourself: What lead times are required to take action? Is information that is valuable ‘right now’ but extraneous tomorrow still important to present? If so, at what level and when? How should it be ‘pushed’ to the user? As it becomes available or in context once a user is logged into a system? Batch-based integration into other systems or information may or may not provide information in a real-time manner as required to provide.

7. Executive perspective is critical – All initiatives with company-wide impact need to have c-level sponsorship. Since SCRM carries a very big stick, this is usually not a problem to obtain. Nonetheless, don’t overlook how to address internal political resistance to a new approach like this.

8. Don’t forget HR – Risk management should be tied to job descriptions and performance evaluations and maybe, more importantly, to train employees.

9. Be strategic – This is not a Big Bang initiative; it is a journey. Leverage Kraljic’s methodology to assess which areas to look at first. Refine your selection by adding revenue impact and sensitivity analysis to make it even better.

10. Be flexible – Assume that whatever you start out with is going to look radically different in one year. Don’t paint yourself in a corner – risk is dynamic and flexible, learn to behave in a similar way.

Although every global company has experienced the pain of disruption, studies have shown that risk management is often not given sufficient attention. Pittman observes, “The scope and reach of the supply chain cries out for a formal, documented process to manage risk. But without a crisis to motivate action, risk planning often falls to the bottom of the priority list. The low priority for managing risk in companies is puzzling.” He continues:

“Having a risk management plan can be used as a competitive advantage, since so few firms have one. An effective risk management process for the supply chain can help companies avoid missed customer commitments, stock outs, reduced earnings, increased time-to-market cycles, and negative impacts to brand perception.”

Because there are so many variables that can affect supply chain performance, the foundation of a modern SCRM process should be a cognitive computing platform that can ingest all necessary data, analyze it for insights and relationships, and provide decision makers with relevant and timely alerts and recommendations. Pittman concludes, “Supply chain professionals cannot afford to delay fortifying their supply chains against disaster and yet many of them do. Regardless of a company’s size and geographical scope, there is no shortage of methodologies to help identify and prioritize risks. Firms must take advantage of the information and tools available now to ensure continuity and resilience for the long-term if they want to remain competitive.”

Footnotes
[1] Marino Donati, “Complexity and risk make supply chains inflexible – survey,” Supply Management, 30 July 2015.
[2] J. Paul Dittmann, “Managing Risk in the Global Supply Chain,” Supply Chain Management Review, 21 August 2015.
[3] Christian Lanng, “Managing supply chains in a globalised world,” FX-MM, 26 August 2015.
[4] Jason Busch, “10 Tips For Getting Started With Global Supply Chain Risk Management Programs (Part 1),” Spend Matters, 17 August 2015.
[5] Jason Busch, “How to Start a Global Supply Chain Risk Management Program (Part 2),” Spend Matters, 18 August 2015.