Understanding the Importance of Supply Chain Risk Assessment

With an increasingly complex global supply chain, manufacturers have continued to focus on building long-term supply chain resilience. Several factors can pose risk to operations. The traditional approach of focusing primarily on cost-effective solutions is no longer enough to sustain processes through potential disruptions.

As companies work to optimize their supply chains, the ability to identify, assess and mitigate risks throughout the supply chain network has never been more essential. A comprehensive risk assessment allows manufacturers to identify potential threats and vulnerabilities, while also highlighting opportunities for innovation.

Self-Assessment Tool for Risk Management

Supply chain issues rarely can be viewed as black and white by smaller manufacturers because there are so many dependencies, both upstream and downstream. While cost will always be a critical factor in finding both suppliers and customers, it’s no longer the main consideration. Manufacturers are now looking at how they can balance cost with risk and supply chain resilience.

This self assessment is necessary as reducing uncertainty comes at a cost. There are always tradeoffs. Supply chain issues now are being viewed in somewhat of a business insurance mindset.

An end-to-end supply chain visibility self assessment (see example below) will cross reference three stages of product flow with activities from the three lenses of a business plan.

The self assessment tool includes three questions for each aspect of the assessment. A manufacturer can quickly see if it has yet to begin addressing the area, it is a work in progress or it has an established approach or plan. This reveals a snapshot of not only the supply chain but also the value chain development, such as product lifecycle management, market and customer segmentation and distribution management.

There is no question that resource-challenged manufacturers have many choices when it comes to focus and attention for ensuring the growth and sustainability of their business. The self assessment tool is a great starting point to help them prioritize needs.

Tip for Manufacturers: Build a Balanced KPI Scorecard

Key performance indicators (KPIs) used to be an afterthought for supply chains as securing materials or parts was the emphasis. But one imbalance in a supply chain can make everything else irrelevant. Keep in mind that a balanced scorecard is a mix of quantitative and qualitative data. Your KPIs should measure 2-3 key metrics such as supply chain risk and quality performance.

Your KPIs should use industry standards where relevant including responsiveness, on-time delivery (OTD), etc. and should be tailored by vendor. Visibility and clarity in communication is a must both internally and externally. It’s essential to properly weight KPIs in a dynamic nature as they provide insight but are lagging indicators.

Key uses for a supplier scorecard include: 

• Measuring performance and driving improvements
• Justifying which suppliers to keep in your supplier base
• Strengthening a negotiating position
• Developing suppliers into better partners
• Rewarding good performers based on objective data
• Gaining consensus on strategic relationships

Impact Washington experts can help you with all aspects of supply chain management and show you how to proactively operate with situational awareness of potential backlogs, the economy, and the state of your market.

The Many Approaches to a Supply Chain Risk Management Plan

Small and medium-sized manufacturers often only have a continuity plan if they have experienced a major disaster. For many, the current disruptions have been that disaster, forcing them to shut down a product line or worse.

A risk management plan can be as simple as a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats), provided it takes into account a wide swath of the business, such as people, parts and supplies, IT and cybersecurity, operations, competitors, etc.

Supply Chain Risk Management To-Do's

Mapping your supply chain and assessing your risks and opportunities will provide you with a mountain of information but not necessarily a roadmap for what to do next to increase your flexibility and readiness. The MIT Sloan Management Review suggests an action list for small manufacturers based on these seven areas:

1. Increase Capacity 
   • Focus on low-cost, decentralized capacity for predictable demand
   • Build centralized capacity for unpredictable demand
   • Increase decentralization as cost of capacity decreases
2. Transition to Redundant Suppliers
   • Utilize redundant suppliers for high-volume parts, less redundancy for lower-volume parts
   • Centralize redundancy for low-volume products with a few flexible suppliers
3. Increase Responsiveness
   • Prioritize costs over responsiveness for commodity products
   • Prioritize responsiveness over cost for short life cycle products
4. Increase Inventory
   • Decentralize inventory of predictable, lower-valued parts
   • Centralize inventory of less predictable, high-valued parts
5. Increase Flexibility
   • Prioritize cost over flexibility for predictable, high-volume parts
   • Prioritize flexibility for low-volume parts with uneven demand
   • Centralize flexibility in a few locations if it is expensive to operate locations
6. Aggregate Demand
   • Increase aggregation as unpredictability grows
7. Increase Capabilities
   • Prefer capability over cost for high-value, high-risk parts
   • Prioritize cost over capability for low-volume commodities
   • Centralize high capability in flexible sourcing if possible 

Linking Supply Chain to your Business Strategy

Impact Washington has experts who can help you align your supply chain with desired business outcomes. 

Have you aligned your supply chain with business goals? Manufacturers should integrate their sales, inventory and operations planning (SIOP) programs with their budget and forecasting effort. This is a cycle of forecasting, demand planning and capacity planning. The demand plan begins with a forecast from sales, how it fits into company goals and capacity issues. This impacts material requirements.

Knowing what is in the pipeline every month helps decision makers share knowledge about risks and what risks may be tolerable. The operations side uses the demand plan to create a supply plan that considers both the capacity and resources available. They may go back to sales and ask to validate the forecast, which is confirmed or adjusted.

Can your suppliers grow with your business? Does the supplier have the capacity to meet your current needs and would they be able to accommodate an increase in your business? Is the supplier financially stable?

Some external indicators of financial risk include losing customers, lawsuits, or the loss of key personnel. You should also consider if a supplier is a good fit for your company. If you place smaller orders, would your supplier prioritize other orders ahead of yours – possibly leading to production delays?

Can your suppliers innovate alongside you to meet new designs? Finding suppliers who understand their role in the product life cycle is critical to supply chain integration and strategy. Meeting production standards at the right price doesn’t necessarily equal long-term value. The competitive advantage in the supply chain is the ability to respond to changing customer demands.

Thinking Outside The Box For Possible Solutions

Smaller manufacturers are increasingly using unconventional approaches to solve problems. The “think outside of the box” mindset was born out of necessity but now is prevalent for some companies. Some examples: 

• Consider capabilities of other manufacturers outside of (but near) your industry. A small manufacturer that was challenged with packaging yarn found a supplier that worked with cables and wiring.
• Take stock of other local manufacturers and their needs or capacity. A manufacturer found success by approaching the largest manufacturer in the region to ask about their supply needs.
• Explore funding mechanisms that could help you retool or pivot to meet demand. Incentive programs often are available to help manufacturers invest in technology to ensure job retention or growth. Possibilities include direct subsidies from big companies to state grants and tax-exempt bonds.
  
  

Supply Chain Management: A Component of Resilience

As previously introduced, improving a manufacturer’s resilience positions them to be situationally aware of potential changes to all aspects of their business environment including their supply chain, in-factory operations, and customer and market demand. Smaller manufacturers can take a series of strategic steps to both reduce exposure to disruptions and increase capabilities to achieve growth without negatively affecting profitability.

Comprehensive situational awareness of the full range of business components allows a manufacturer to plan and put in place integrated strategies and tactics that provide proactive protections and responsiveness through appropriate risk identification and management. Resilience improves competitiveness, while simultaneously enabling sustainability of business operations.

For manufacturers to be resilient, they need to be proactive and responsive. Supply chain disruptions will likely continue well into the future. From our experience, about 80 percent of small to medium-sized manufacturers are reactive, but they see the need to be more proactive and are taking steps to find long-term solutions that mitigate their supply chain risks.

Achieve Supply Chain Resilience with Impact Washington

The manufacturing process for any product relies on access to essential materials. However, sourcing rare resources or navigating complex supply chains can be challenging. At Impact Washington, we understand these difficulties, especially when striving for American-made standards or reducing the impact of international shipping.

Our No-Cost Supplier Scouting Services are here to help your organization overcome these obstacles. We specialize in connecting you with the right suppliers who can cater to your unique needs.