2 weeks Ago
Supply chains remain an area of concern for leaders across industries. “Unknown unknowns,” which are events that cannot be predicted because there is no historical precedent, are a particular area of concern. The possibility of an unforeseen risk one cannot predict or prepare for is a worst-case scenario for many businesses.
However, true “unknown unknowns” are extremely rare or even non-existent. Take the COVID-19 pandemic as an example. For many people, especially those outside the risk management field, a pandemic felt unprecedented, and thrust the supply chain into the spotlight.
However, it was not — or should not have been — so shocking for those with relevant expertise. While risk management professionals could not foresee that a SARS-CoV-2 outbreak would cause such a disruption in 2020, global health events that have deep business impact have happened before, such as H1N1, and can be prepared for. Public health is a known risk.
So are labor shortages, infrastructure failures, and regulatory complications — even trade policy events such as tariffs. We have a wealth of information and precedent to learn from, meaning the overwhelming majority of risks are actually “known unknowns.” While businesses may not know the exact disruption, or more importantly the combination of risks, and disruptions what is known is not if, but when, disruptions will occur.
With all this knowledge, why do supply chain snags still happen, and why are some companies seemingly caught off guard? The primary answer is that some companies are not as organizationally mature as others in terms of people, process and technology. What does this mean? For many, their teams lack the skills, the process discipline, and the enabling technology to support them. Or they have invested in technology but believe a “tool” will save them, while ignoring the importance of people and process.
Risk management follows a bell curve. A small group pioneers the field, then many more learn from and follow their path, while another small group lags far behind. Among these organizations that struggle with preparedness, common characteristics include an absence of centralized frameworks, and a lack of cross-collaboration.
They also often exhibit a failure to integrate technology with data and human expertise, as well as a lack of functional collaboration between procurement, finance and operations. This hinders their ability to predict possible disruptions, and severely impedes progress toward true resiliency. While many aspects of the supply chain have evolved over the last 15 years, the key concerns for supply chain leaders remain largely unchanged.
Cost optimization, risk management, value creation, strategic alignment and application of technology are still top of mind. This boils down to one question: What balance between risk and cost is correct for our organization? While there is no magic bullet, there are effective strategies leaders can implement to assess their current situation and plan for possible futures. To be clear, risk and cost are interconnected.
Lack of focus on risk will drive up costs. Understand the Full Landscape Instead of considering resiliency as a tier-one challenge, companies need a tier-N view of the world. A company’s ability to have a high-performing supply chain doesn’t just rely on the company itself; it depends on its suppliers or from whom those suppliers are buying.
In today’s world, companies don’t compete — their supply chains do. For example, nickel is a key component of lithium-ion batteries used in electric vehicles. Suppose a company uses high-nickel steel, and lacks visibility into other industries that use nickel.
In that case, they may encounter an unexpected shortage of materials or issues driven by another sector. To effectively identify risks and vulnerabilities, this company would need to develop a robust understanding of several supply chains, including those of its suppliers, as well as stumbling blocks from entirely different industries. Get to the Root of The Problem To build a resilient supply chain, companies cannot settle for just addressing short-term solutions that temporarily fix an issue.
In continuous improvement methodologies, this is referred to as addressing the symptoms rather than the root cause. This is easier said than done, especially in a high-stress environment where crisis management seems normal, and disaster feels ever-present. We often see organizations becoming desensitized to global events, leading to complacency and a lack of urgency in addressing the root problems.
One tactic for identifying core issues rather than stopping at symptoms is to use the “five whys” approach to root cause analysis. Posing the question “why” five times helps the inquirer delve deeper and consider new angles. For example, a company experiencing product delays may follow up and discover that it is due to a lack of components, which is itself caused by the rarity of a particular material.
Finding this answer enables them to address the actual issue and consider using alternative materials or suppliers. Prioritize Scenario Planning Proactivity is the name of the game. One of the best things supply chain leaders can do is pull their teams into scenario planning.
This involves creating a safe environment and conducting tabletop exercises to explore various 'what-if' scenarios. Doing this helps exercise the team’s planning muscles and trains them to assess various risks, including how different scenarios affect tier-one and tier-two suppliers. By building and testing these scenario plans, companies can identify their points of failure, determine which combination of factors will have the most significant impact, and understand which suppliers they should collaborate with.
Supply chain leaders have a wealth of tools and information to manage risks and build resiliency, but they also need a strategic approach. It comes down to understanding specific supply chain needs, how your company fits into the broader landscape, and planning for as many scenarios as possible. This approach delivers sustained long-term success and breaks the cycle of short-term crisis management and repeated risk mitigation.
Caldwell Hart is principal, procurement & supply chain management, risk & advisory at Avetta ..
