The growing importance of supply chain risk management

The growing importance of supply chain risk management

The growing importance of supply chain risk management

Against the backdrop of a highly disruptive and volatile market environment, supply chain risk management has risen to the top echelons ofboardroom agendas. Vivianne Courte-Rathwell, a Consultant at Sourcing Champions, explains why the concept is gaining importance – and outlines some of its main benefits.

A review of the historic supply chain disruptions of the past few years would hardly be news to anyone. In an unprecedented ‘risky’ period, with a pandemic, climate change, a Russia-Ukraine war, geopolitical pressures, and much more, it is no surprise that global supply chains have recently been dealing with heightened risks.

However, it is key to keep in mind that such disruptions do not only occur in unfortunate periods of history. Risks are by nature ubiquitous and unpredictable, and that means that leaders need to embrace an approach that helps them mitigate, adapt and learn.

In 2012, there was a disastrous tsunami in Japan which impacted the automotive industry worldwide. In 2015, an immense explosion at one of the largest ports in the world, the Port of Tianjin, caused significant costs and losses. In 2018 the US – China trade war negatively impacted profit margins and created tense times of uncertainty.

It is impossible to conceive to avoid all risks. Instead, the key is to mitigate significant damages through foresight in strategic management.

After the tsunami of 2012, automotive organizations had nowhere to turn as many realized that their single source of materials was Japan. Even OEMs with a multi-sourcing strategy encountered issues because many tier-1 suppliers procured materials from the same tier-2 supplier. As a result, the challenges of tier-2 suppliers became a direct concern as well.

Had there at the time been a multi-layer supply chain risk management (SCRM) program in place, these issues could have been (easily?) avoided and impact to the business would have been minimized. SCRM tools and processes act as guardrails and shields protecting the business from potential perils, hence providing a competitive advantage.

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External Insights Critical to Effective Supply Chain Performance

Traditional forecasting models that leverage historical data to predict future performance are the tools used by most supply chain executives to plan critical functions, yet these predictions are frequently inaccurate. In fact, research from KPMG International, in cooperation with the Economist Intelligence Unit, shows that most quarterly forecasts are off by 13 percent—meaning that supply chain managers are basing their decisions for ordering materials and scheduling distribution on erroneous projections. The result can mean surpluses or shortages, potentially costing companies millions either way.

There is a better way to anticipate supply chain demands—one that can vastly improve projections, and decrease the discrepancies between forecasting and reality, therefore helping supply chain executives perform their jobs more effectively. Few companies take into account macroeconomic factors, global manufacturing activity, consumer behavior, online traffic, weather data, etc. when making business projections. Yet companies that do identify leading performance indicators using such external data earn more than a 5 percent higher return on equity than those that use only internal metrics. Leveraging external factors, in addition to internal performance measures, is proven to result in more accurate, effective forecasts. Not to mention that improving forecast accuracy can represent huge bottom-line benefits. For a billion dollar manufacturing company, for example, improving forecast accuracy and overall return on equity even 1 percent can equal a $3 million increase in net income.

Forecasting accuracy, improved through external factors, benefits multiple business functions—from financial operations (shareholder value) to human resources (adequate staffing) to marketing (product innovation)—but is especially impactful on the supply chain management function.

Improves Inventory Management

Improved forecast accuracy using external drivers equates to reduced inventory management costs, ultimately improving bottom-line profit. By accounting for external factors, companies can see a 10 to 15 percent improvement in forecast accuracy, significantly decreasing the cost of excess inventory. By ordering raw materials based on correct projections, supply chain managers no longer have to worry about discounts necessary to move excess inventory or the cost of warehousing excess materials because they are ordering accurately from the start.

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