Supply Chain Leaders Need a New Playbook, Focusing on Risk

For generations of supply chain leaders, the key words and phrases that dominated were optimization, rationalization, cost reduction, inventory reduction and so on. The basic performance of the supply chain was stable enough that it was often taken for granted.

Everything has changed. At first that change was dramatic, but there is no "return to normal" for supply chains. Different perspectives, metrics, processes and capabilities will be required. Supply Chain Risk Management is the new altar. Where do we go from here?

Assessing Risk

It's important to recognize that how you think about risk affects how decisions get made, how people get measured and even how you design your organization. After decades of focusing on cost down and optimization, the principles of managing the supply chain must be the first thing changed.

A core principle is that risk reduction and mitigation are your first priority. Risk in supply chains is not going away, and for many reasons will both likely increase but also change dynamically as to what risks require the most attention.

Material shortages can occur for a wide range of reasons, including market manipulation and stockpiling. Geopolitical risks have increased if not in volume, at least in potential magnitude. Climate change has rocked supply chains via many causes but led by flooding. Transportation disruptions have been caused both by aging infrastructure around the world but also via malicious activities. And cybersecurity risk will likely increase continuously until some breaking point is found.

Lehigh University's Center for Supply Chain Risk, led by Professor Zach Zacharia, measures quarterly supply chain risk across a range of factors. “It is insightful to see how supply chain executives across multiple industries consider which risks are high risk versus much lower risk in the upcoming quarter,” Zacharia says.

Participants in the quarterly survey both provide their inputs and receive final reports. I encourage all readers to participate, as broader engagement not only increases the value of the data but also its utility to recipients.

While the remainder of this article will outline a few thought-starter strategies, nothing compares to engaging with and learning from peers to stay ahead of the risk landscape.

One particular aspect of assessing risk is how you look at your suppliers. Traditionally, suppliers were ranked based on how much was spent. That's consistent with a cost-first mindset. When we shift to a risk-first mindset, it makes sense to rank our suppliers based on how much revenue they are linked to. In other words, if something happens with that supplier, how much will we be hurt?

Strategies for Supply Chain Design

Supply chain risk reduction isn't the sole responsibility of the supply chain organization, but we will start there. The most obvious strategy is a return to dual-source supply for critical elements, which we've already seen trending. But even where you can't dual-source, you can designate dual-location manufacturing and/or dual location warehouse storage to reduce risk. Near-sourcing also helps reduce risk, both for transportation but also communication, which is a key variable when managing risk.

The key thing to remember is that you can't eliminate all risk, so how well both you and your suppliers manage risk and recovery are vitally important. For super-critical suppliers, have you done a tabletop simulation of a potential risk to build some muscles of how you will recover?

But risk mitigation of suppliers begins with both selection and contract design. While you won't always get terms such as priority delivery when in an allocation situation, you must be thinking of these terms in contract development.

Product design is an underutilized area of risk mitigation. The more we reuse existing components—and overall simplify the component landscape—the fewer risk end points we have and the more flexibly we can shift supply when risks are realized.

Speaking as an engineer, I can say that many engineers often prefer optimal design even when it doesn't produce a true enhancement to value. Understanding how design choices affect supply chain risk should be part of the culture and process in product development.

Lastly, we must also consider our organization design. Who owns supply chain risk, both in assessment and in mitigation? Is it in their job title? Ask yourself, who will wake up on any random Tuesday thinking first and foremost about supply chain risk? If you can't easily answer that, then your organization is not designed for success.

Along with organization design, you must consider the metrics and the incentives. If every time people look at the need to carry more inventory, they fight it because it hurts their cost metrics, then your incentives are set up for optimization and not risk reduction.

Strategies for Execution

You can never eliminate all risks proactively. We still must be prepared to fight the fire. Are you prepared? I break this down into Monitor, Mobilize and Mitigate.

Monitor means having the right sources of information, both public and private, so that you know when risk is becoming realized. Will you be the first to know? The longer it takes to find out, the fewer options you have. Is there an out-of-control wildfire over the hill from a supplier warehouse? Was your 3PL hit by a cyberattack? Knowing is half the battle, because you cannot solve the problems that you cannot see.

Mobilizing requires that you can get the resources needed to fight the battle to act quickly, and to act well. If you need a design team's help in exploring alternative components but can't get a meeting with the leader scheduled for two weeks, then you are not prepared to mobilize. When firefighters get the call, they don't respond by saying, “This is not a convenient time.”

"Taskforce mode" is one effective strategy, where the resources required are essentially relocated, either physically or virtually, and their existing calendar is null and void. The team is assembled quickly and can collaborate until the problem is solved. Consolidating decision-making is another strategy to cut through red tape and make things happen. This is when decision-rights that are normally widely distributed areinstead pulled into a critical few who can balance the trade-offs, and move much faster. It may not be the right way when things are stable, but it certainly helps in a crisis.

Finally, you then must mitigate the risk, either potential or realized. Having your playbook or menu ready to go is helpful. It doesn't have to be elegant or original, just effective. Sometimes simple expedites and hoarding (stockpiling) are enough, and sometimes you must consider more invasive options such as product redesign.

Supply chain risk management is here to stay. For many organizations, revolution is required over evolution in order to face the challenge. Are you ready?