FM Global’s Philip Johnson discusses the importance of good decisions and sound data in relation to supply chain resiliency in Business Review Magazine;
Supply chain resiliency is based on good decisions and sound data
European companies are becoming increasingly dependent on the emerging economies for production, new facilities and customers. According to McKinsey Global Institute, by 2025, nearly half of the Fortune Global 500 companies are likely to be based in developing countries – up from only 5% in 1990 and 26% in 2013.
It is this migration to developing countries that makes supply chain management increasingly important for multinational companies today.
Supply risk in emerging markets
Supply chain risk is a major threat to business continuity. Disruption can reduce a company’s revenue, cut into market share, inflate costs, or threaten production and distribution.
With this in mind, European companies should follow these three steps to supply chain resiliency:
1. Identifying suppliers
Identifying critical suppliers is the first step towards understanding your exposure to supply chain risk. Your company may have only a few suppliers or – like some companies – hundreds or even thousands. Your company may also be the supplier in another company’s supply chain. How will a disruption downstream impact the profitability of your business?
2. Identify the risks shared by your company and your suppliers
Once you’ve identified your key suppliers, the next step is to conduct an accurate risk assessment. The following risks apply to many companies today:
• Natural catastrophes. Emerging markets may have distinct cost advantages, but they are often areas that are vulnerable to natural catastrophes. They can be located near major fault lines and flood zones, and exposed to risks such as tsunamis, hurricanes and earthquakes.
• Social/Political/Economical factors. There have been no shortage of issues relating to these factors recently, as witnessed by terrorist attacks, political turmoil and the economic impact of increasingly complex supply chains.
• Market influence. Is your supplier resilient to financial volatility? If not, disturbances to the supply of product within your supply chain could have a devastating impact on your bottom line. And what do your suppliers know about the market resilience of their suppliers? Their exposure could be your exposure.
• Business practices. The supplier’s financial and management stability, as well as its internal processes and corporate governance practices, should be understood for the risk they represent. For instance, disruptions to a supplier’s internal operations can easily ripple through to your organisation if not mitigated properly.
• Physical plant. Loss prevention measures are as critical to your supplier’s facilities as they are to your own. The difference is, you don’t manage your supplier’s facilities.
3. Loss prevention
Once you know who your suppliers are, how do you mitigate the risk they bring? This requires a deeper understanding of the suppliers’ business operations and its ability to recover from a major disruption.
There are several ways to mitigate supply chain risk, through risk improvement efforts, switching to suppliers with less exposure, or by spreading the financial impact across multiple suppliers. Cultivating alternative sourcing arrangements is typically the best way. Do you have a plan C for when plan B goes wrong? Increasing your inventory levels (of raw materials or finished goods); creating business continuity planning requirements for all suppliers; planning for substitute products and service or redesigning products to allow for greater supplier flexibility are among viable options to create a strong risk management plan.
Using data to identify and prioritise risk
As well as following the three steps above, using data and technology is crucial to identify and prioritise the risks facing your supply chain.
Back in 2013 we created the FM Global Resilience Index, an interactive, publicly available tool that ranks the supply chain resilience of 130 countries and territories, aggregating nine drivers of resilience into three factors – economic, risk quality and supply chain.
This article first appeared in Business Review in December 2015.