Redefining Supplier Risk Assessment in the New Normal
As global supply chains become more interconnected and increasingly complex, the detrimental impact of the pandemic keeps expanding daily. Global businesses across both developed and developing economies have been severely affected in 2020 and are facing multiple challenges within their supplier management program due to constant labor shortages, price reductions due to a lack of demand for some industries (such as oil and gas), unprecedented lockdowns in key operating locations leading to supply chain slowdowns and closures in multiple phases, the inability to work remotely in specific industries and work barriers, and demand reductions due to buyer convergence towards necessity commodities.
How Has Supplier Risk Assessment Changed?
Procurement and supply chain organizations are realizing that traditional risk assessment practices might not help them navigate the current environment. Assessing supply risk has often been a labor-intensive activity where technological investments are very rarely made. Usually, companies followed a fixed strategy where risk assessments were conducted only once a year and a single executive was generally in charge of managing thousands of vendor relationships. This resulted in companies lacking visibility into how many suppliers they have and the level of risk they are engaged with.
What is the “New Normal” in the Current Situation?
Businesses are assessing their vendor relationships more frequently and are also using new metrics to assess those vendors. Various metrics like shifting payment terms, demand forecasts and interest rates are being leveraged to renegotiate contracts. Furthermore, companies are demanding to know the situation of their vendor on a week-by-week basis. Assessing if the supplier is late on its own payments was fairly common. In the new normal, lengthier payment terms and delayed B2B payments are increasingly common, thereby increasing risk.
Many suppliers might also choose to overhaul their business models. Suppliers whose primary source of revenue came from a particular product or service might no longer have that same priority and could choose to diversify or shift their focus to different products and services. Now it is crucial to assess vendor priorities and identify fitment of priorities with the client.
What Steps Can Companies Take to Mitigate Risks?
Enterprises need to enable end-to-end supply chain risk assessments and prioritize focus areas by proactively engaging supply chain partners, such as suppliers and logistics service providers, to conduct a risk health check. They must also develop a robust risk management process and diversify supplier networks by properly mapping the network out from end consumers to tier-N suppliers. Integrating digital and automation with manufacturing excellence and leveraging it for smart manufacturing to reduce reliance on labor-intensive processes is a priority to mitigate labor risks.
Additionally, evaluating and reviewing category-strategic procurement priorities is necessary. Striving to meet the company’s overall supply chain objectives by transforming procurement into a value-added function through timely reviews and adjusting category strategic priorities to define new business relationships with suppliers will be the norm for procurement organizations moving forward. And finally, using innovations that can bring more agility and collaboration within the enterprise as well as across business partners are now a priority.
Almost 80% of organizations globally are facing raw material shortages and it is expected that the disruption will increase in severity, having a long-term impact through the year. Thus, supplier financial and risk assessment is necessary to evaluate the risk exposure of key suppliers for every company. Assessment should be done taking into consideration key factors affecting suppliers because of the crisis. Companies should look at creating contingency plans, starting with scenario-planning strategies for different demand environments. Mitigating supply shock by working closely with existing suppliers while diversifying the supply base is a must. Companies can manage demand volatility due to panic buying situations while taking on a responsible retailer role. And finally, enterprises should make work safe by investing in protective gear for supply chain workers and communicating via apps to manage time, availability and safety.