Risk & Economy » Mitigating supply chain risk in choppy waters

In today’s unpredictable economy, defining the partners and suppliers that you work with is critical – not just to a company’s reputation, but to its growth.

You only need to look at KFC’s dispute with DHL this year, whereby the supplier was unable to provide enough chicken to the fast-food chain, hampering its ability to sell. Despite forewarning by trade union GMB, KFC closed 750 of its 900 UK stores and made headlines for all the wrong reasons. Similarly, last year John Lewis and Habitat were forced to withdraw kitchen worktops when they uncovered human slavery violations.

The resulting impact of supply chain risks over the past few years has led to the introduction of the Modern Slavery Act and UN/EU sanctions. Updating existing laws has also been a priority in accordance to the societal demands; the GDPR is a necessary privacy regulation and a response to the rising use and misuse of data. Mitigating supply chain risk in the context of globalisation, increased worldwide business activity, economic fluctuations and geopolitical uncertainty can be a challenge.

A one-size fits all approach is never the solution

Businesses must investigate supply chains to uncover and mitigate possible threats. A recent Dun & Bradstreet report, published in partnership with Cranfield School of Management, found an increased risk in the first quarter of 2018 for European countries, with international supplier relationships located in high-risk countries up 10% compared with the previous quarter. The analysis found noticeable differences between sectors; retailers were most dependent on key suppliers (75%), both manufacturing and wholesale firms faced high risk of global exposure (20%), and construction firms were the least exposed to foreign exchange risk (10%).

The difference in the findings indicate that the level of supply chain risk differs between sectors. For example, retailers must procure material and products from all over the world to meet the demands of fashion trends, and therefore have seen an increase in international dependency. Manufacturing firms often look to source the cheapest material and are exposed to fluctuating costs, which can be influenced by economic conditions. Meanwhile, construction companies are most likely to work in a closed network and access resources from a reliable supplier; i.e. it can be easily reordered with minimal additional cost.

For a construction firm, it makes more sense to source material in the same country due to planning and strict scheduling. But some retailers, for example, will rarely rely on local markets to provide the material needed. These two very different scenarios show how diverse supply chain risks are. In the KFC situation, the fast-food chain changed suppliers, but they didn’t foresee the issue before it was too late. This caused significant damage to its brand.

Both sides of the coin: external factors are as important as internal processes

Although every company will face individual supply chain issues, they do share one attribute: they all want to expand and develop. Businesses looking to enter new markets will continue to experience stark challenges: a more fragmented, longer and increasingly complex supply chain. Not having full visibility into a supply chain will lead to an increased level of exposure.

This exposure can be traced to many factors, both external and internal (such as fraud and likelihood of a supplier ceasing business). For instance, the global political environment continues to hamper the economy. Donald Trump’s tariff dispute with China continues to escalate, with both the Dow Jones and markets in Asia losing value. A US-based company trading with another in China will face increased risks in supply chain operations. The cost of imports might rise and have a major impact on operating costs, particularly for smaller firms. However, it’s not always negative.

The Bank of England signalled that interest rates may rise in August, leading to the pound increasing compared with the dollar. This is positive news for businesses and the economy, but what does it mean for mitigating risk and how can organisations use that information to decrease supply chain risks. It all boils down to data. Feed this information into the internal supply chain and you can maximise revenue, profits and growth.

Clean data is the only way to predict the unpredictable and protect the business

Businesses need to prepare for every scenario in today’s market. And the only way to do that is by introducing a data-led approach. Access to relevant and clean information on every aspect of their business operations can uncover efficiencies in the supply chain. For example, if interest rates change, this information can be fed into the supply chain and can be used it to renegotiate with suppliers to find a better deal that saves both parties money.

There is power in pairing third party information alongside a company’s own data and historical records. All three sources of information can help formulate a comprehensive view of operations and supplier relationships. It is equally important to have this data readily available in one central location. After all, the right data can also unlock opportunities.

Access to certain information and insights can also help businesses identify cost savings, such as highlighting a risky supplier relationship or an alternative, cheaper partner. These are the business decisions that can accelerate development and protect a firm’s reputation.

By using all information available, firms can adequately identify, screen and gain visibility into their supply chain. By doing this, businesses can avoid regulatory penalties, scandals and disruption, but also take ownership of relationships with suppliers, resellers, manufacturers, distributors and customers.