3 Strategies for Dealing with Supply Chain Disruptions
April 7, 2022 |
The C2FO team
You don’t just do business with your suppliers. In a very real sense, they’re a part of your business. Which means you need to be prepared if they suddenly aren’t available.
It’s a situation that many enterprises have faced recently as supply chain shortages have derailed business as usual around the world.
New uncertainty — caused by the COVID-19 pandemic, geopolitical tensions, the rising cost of raw materials, changing trade tariffs and other factors — has created more volatile forms of financial and operational risks for suppliers.
These risks have a knock-on effect on the whole chain, causing huge delays that derail production and hemorrhage cash in the process. Automakers, for example, were forced to cut production and even remove features to work around a lack of parts.
It can happen to practically any business. According to Gartner, 89% of companies have gone through a supplier risk event in the past five years. Business consultancy EY reported that British companies issued 19% more profit warnings in the last quarter of 2021 than in 2020, and a record number of them cited supply chain disruption due to rising costs as the main problem.
Supply chain issues have escalated further this year following the Russia-Ukraine war due to the sheer scale of commodities the two countries produce. Russia and Ukraine supply around 80% of the world’s sunflower oil, 26% of its wheat and 30% of its barley. Ukraine is the biggest producer of neon, which is used to etch microchips, while Russia is the top supplier of nickel and palladium, used to make car batteries and exhaust systems, as well as aluminum and iron. And that’s before we even get to its rich supply of gas and oil.
As demand for core products and services has skyrocketed, many procurement teams have been left scrambling to find backups. Don’t be one of the unlucky ones — here are things you can do to make your supply chain more resistant.
1. Understand where you’re vulnerable
The first and most important step is to have a clear view into your supply chain, so you know where the potential risks lie. There are a number of software solutions, like Venminder and OneTrust, that can help you monitor potential threats among your vendors.
If you don’t have access to those tools, performing a supply chain vulnerability assessment (or audit) is a great exercise that forces you to look at every link in your supply chain and identify the full universe of potential risks at each stage.
One of the most important questions you should ask is: Who are your strategic or “must have” suppliers? Larger enterprises should create (or update) their taxonomy for describing different types of suppliers, so that it’s clearly understood how and why they work with specific suppliers, as well as their operational impact.
After you have identified your risks, create a supply chain risk matrix to prioritize them.
Categorize risks by (a) their potential harm and (b) the likelihood that they’ll happen. Now you can clearly see which threats you should tackle right away (the high-impact, high-frequency ones) and which ones can wait. Supply Chain Digest has a good example if you’re just getting started.
Auditing your supply chain can help you better understand potential risks, but it has limits. Your suppliers may not agree to identify every supplier in their supply chain, for example, or your supply chain might be so large and complex that you simply can’t find every single provider of raw materials.
And there will always be something that you simply couldn’t see coming, like a once-in-a-century global pandemic or a war in Europe.
How do you prepare for unknown risks? McKinsey & Co. recommends:
Building a layered defense: Use multiple processes and policies to prevent unwanted outcomes. For a procurement team, that might mean seeking additional suppliers, creating incentives for suppliers that invest in resilient processes, and training the team so they can better find new suppliers and new product categories.
Developing a risk-aware culture: Where policies fail, employees can step in — if they know that it’s safe and even encouraged to point out problems and if they’re empowered to take action and address potential problems. A risk-aware procurement team will increase engagement with external partners and internal stakeholders, and it will look for ways to improve progress monitoring.
2. Treat your suppliers as partners
After you audit your supply chain, you’ll probably have an even greater appreciation for your suppliers and their potential impact on your organization.
To make sure they’re ready when tough times strike, treat your suppliers like business partners. This means considering a number of factors.
You should be in regular communication with your suppliers, weekly if possible. Both sides should have a habit of asking and telling the other about potential problems and disruptions at the earliest opportunity. Be clear about what you expect, confess to mistakes and generally be a reasonable human being.
It’s also a good idea to help your long-serving, most trusted suppliers understand how your business works and what your plans are. Are you adding locations? New product lines? Likewise, you should seek to understand your suppliers’ business, their plans and their supply chains — who are they depending on?
If you want suppliers that you can rely on, then you need to help your suppliers remain financially healthy — not an easy task in a time of unprecedented inflation.
Offering an early payment option for your invoices is a great way to help because it allows your suppliers to access funding at a lower cost (compared to borrowing from a lender) and enables cost savings for you.
C2FO makes it simple and even profitable for enterprise buyers to speed up their payments. With our automated platform, your suppliers will offer a customized discount for early payment. Meanwhile, C2FO’s support services take the workload of communicating with suppliers off your team’s plate, giving you more time to focus on other business priorities.
It’s an easy win because many suppliers are happy to give cost savings to their customers in return for cheaper, flexible capital.
3. Be ready for when things go wrong
When things break down, you’re going to want to have an emergency plan ready to go — an actual written plan. That document might be as simple as the questions you need to ask or the critical areas that need to be monitored. It might include a list of potential backup suppliers.
Even before disaster strikes, you should diversify your network of suppliers, especially by geography, so you can continue to operate even if a natural disaster or political upheaval affects one region. That could mean working with multiple companies or a single company with facilities in multiple locations.
Depending on your line of business, you may also need to stock up on critical inventory and commit to having enough on hand for a predetermined amount of time. That way, you can keep the lights on even if all your suppliers are completely unavailable to respond. Grocery stores, furniture manufacturers and smaller retailers have all increased inventory orders as a result of supply chain shortages.
Finding storage for stockpiling — and the vessels to transport the material — has been a huge problem for companies, too. This is why it is imperative that businesses keep up good lines of communication between all their suppliers to avoid making a difficult situation even more expensive.
It should be noted that some observers, like Putnam Investments, argue that stockpiling will end or even reverse later in the year as supply chain issues are resolved.
Having reliable access to working capital can help here, too — an extra layer of security you can afford your suppliers with C2FO’s Early Payment Program. If you have sufficient access to affordable capital, you and your suppliers can invest in larger purchases of inventory and even score bulk discounts.
The bottom line
If you don’t plan for potential supplier disruptions, you’re putting your supply chain at risk. The key is to assess the potential for disruptions, build up your supplier network and provide tools to support your suppliers, such as access to readily available working capital if they need it.
Have a plan in place for what you’ll do if those business partners are suddenly unavailable, and keep up communications between your suppliers and procurement teams to ensure you have the capacity to store extra materials and the time to put your solution to action.