With the next supply chain risk disruption right around the corner, here are seven signals to proactively monitor in 2019.
A key supplier shuts its doors. A critical component is no longer available. A product is not up to standard and has to be recalled. Any one of these problems—let alone all of them at once—can bring operations to a grind or worse yet, a standstill, but many times the issues aren’t caught until it’s too late. But hey, we’re all so busy at our jobs, being pulled in many different directions and too distracted to think about what could happen, right?
Wrong. There are clear signs of global supply chain strife that all companies should be monitoring, assessing, and evaluating on an ongoing basis. Skip this step and it won’t be long before your organization finds itself struggling to meet customer demands and to fill in the gaps in its supply chain.
Seven Indicators of Supply Chain Risk Not to be Ignored
If you’re experiencing any of these problems in your supply chain right now—or even if they’ve been prevalent in the past—then developing and implementing a proactive, comprehensive, supplier risk management program should be a top priority:
1. Unexpected transit delays or missing components. A red flag should go up when orders start to arrive later than expected or when those orders are missing key components or parts. Engage with your suppliers about the problem now (rather than later), find out the root cause of the problem, and start identifying alternate sources of supply in case they become necessary.
2. Production problems from Tier 2 or 3 suppliers. Although no less vital to the supply chain, Tier 2 and 3 suppliers are harder to keep tabs on, which translates into lower risk visibility. However, if these suppliers are the first link in the supply chain, and if they start the ball rolling for the OEM’s final product, they’re vital to the speed of production. By staying abreast of current or potential production problems at the Tier 2 or Tier 3 level, you’ll be better prepared to deal with any issues that impact your operation. Tier 1 cooperation is critical to sub-tier visibility, and worth every moment of discussion time with them over how to collaborate on this vital risk management need.
3. Financial issues, including cash flow problems or bankruptcy. No one wants to hear that one of their key supply chain partners is in dire financial straits, but in today’s business world, it happens all the time. Pay attention to changes in the Financial Health Rating that might point to potential cash flow problems or even bankruptcy, and start lining up alternate sources of supply, just in case. Remember, companies’ problems can be spotted well before they finally fail and looking at forward looking financial measures are critical to proactively managing these risks.
4. Cost increases in raw materials, services, and projects. Commodity costs fluctuate under normal circumstances but add tariffs and trade wars to the mix and you could wind up with a global supply chain risk recipe that’s hard to predict and manage. Exacerbating the problem are the higher costs of transportation associated with driver shortages, higher fuel costs, and new governmental regulations. The best defense is a good offense in this case. Talk to your suppliers about the cost increases that they’re dealing with, watch the major indices, and prepare your company for any otherwise-unexpected price increases that may impact it this year.
5. High debt levels, higher interest rates, or an inability to access capital. Where companies have had cheap and easy access to capital over the last decade, rising interest rates in the future will lead to costly refinancing – and potential failures – for suppliers dealing with high levels of debt. Leveraging key risk indicators such as the FHR® can help you keep close tabs on your business partners’ (both public and private) financial standing and act accordingly if or when an issue arises.
6. Product quality issues or recalls. Even if we weren’t personally affected by it, most of us still have the ghosts of 2018’s massive romaine lettuce recall in the back of our minds. This is just one example of an event that rippled across the entire supply chain—from the grower to the salad-lover, and everyone in between. Product contamination, equipment recalls, and related events can take their toll on a supply chain. Hard to see coming, these events should be monitored closely, reacted to accordingly, and headed off before they create huge financial impacts for your company.
7. High dependency ratio, or the percentage of your business that comprises the supplier’s total revenue. If your supplier relies heavily on just a small handful of customers—and if you’re one of those customers—then you could be in for a shock when that company’s order pipeline runs dry or even just “lighter” than usual. Downsizing an order that you’ve already placed, for example, could cripple your supplier and create unintentional disruptions. This is why it’s so important to understand that potential financial impact that your business has on your suppliers. If the dependency ratio is high, and if you have heavy exposure with any specific vendors, you’ll want to look more closely at those relationships and exposures.
In today’s interconnected business environment, your suppliers’ risks are your risks, and effectively managing risk is a nuanced process that is becoming increasingly challenging. Our latest webinar provides actionable strategies for how to mitigate and promote resilience in a complex business environment.