The recent “once-in-a-generation” occurrences have made companies realize the significance of efficient risk planning and management and how exposed their supply chains can be.
Nassim Nicholas Tayeb, a statistician, introduced the term “black swan,” referring to an infrequent and unforeseeable event that can cause severe consequences for companies and industries. Due to its low likelihood of happening and the potential for significant consequences, it is challenging to prepare for.
However, a majority of companies globally, about 65%, have a basic level of risk management that can only effectively address known risks, such as supplier bankruptcy, and not the unknown or unpredictable ones. Furthermore, due to increasing global interconnectedness, geopolitical tensions, and other disruptive sources, black swan events are occurring more frequently.
The impact of a black swan event on a company, and even on an entire economy, can be devastating in the long term. Such events can cause financial losses from infrastructure damage, reduced demand for products or services, shortages of materials or parts, and significant delays in freight transportation.
A company’s reputation can also suffer, especially if it or the industry it operates in is partly responsible for the black swan event. The way a company handles a catastrophic event is closely observed and judged for years to come.
In addition, poor crisis management by businesses or industries can lead to legal and regulatory challenges, triggering investigations that add to the costs and complexities of returning to normal.
Effective risk management during a black swan event requires businesses to prioritize supplier diversification, but this necessitates advance planning. A multi-sourcing approach entails including suppliers owned by different individuals or groups in the supply chain, effectively serving as insurance against the failure of a single supplier.
Diversification can involve expanding the supplier network to include both domestic and international partners. Domestic suppliers typically charge more than global ones, but they can offer shorter lead times and more personalized service, making them less likely to fail during a black swan event.
One of the most significant advantages of this approach is the ability to create a safety net in case a supplier encounters difficulties, minimizing disruptions. For instance, the obstruction of the Suez Canal in 2021 resulted in a 15% to 21% reduction in trade vessel capacity between Asia and Europe, but having multiple suppliers would have likely reduced the economic impact.
In addition to the financial and logistical benefits, supplier diversification allows companies to achieve social responsibility goals by supporting new and small businesses without significantly increasing supply chain risks. The following are steps that can help companies achieve these objectives.
PRIORITIZE END-TO-END DUE DILIGENCE
During a black swan event, the maintenance of strict quality control is a procurement risk metric that is often overlooked but is a critical component of effective procurement strategies.
Procurement professionals tend to prioritize supply chain disruption, supplier relationship management, and maverick spend, but they mustn’t neglect quality control. In the event of a highly disruptive black swan event, quick identification and onboarding of alternative suppliers may take priority over quality. Therefore, businesses must ensure that their procurement strategies prioritize quality control and have backup plans in place in case of disruption.
At all times, businesses should measure and assess supplier performance to ensure that they meet key performance indicators. The CIPS Procurement Cycle comprises 13 stages, starting with the request for proposal specification and ending with asset management.
Supplier scorecards provide a concrete means of ensuring essential KPIs such as quality of products and services, delivery timeliness, and more. By leveraging scorecards, businesses can effectively manage supply chain risks and prevent costly problems such as missed deliveries, delays, and product damage.
DEPLOY SPECIALIST SOFTWARE
As artificial intelligence and automated systems become more widespread, it is expected that the use of specialized technology and software in procurement will increase significantly in 2023.
Effective supply chains rely on shared information, which can be challenging to analyze, interpret, and act on without a central platform that provides 360-degree visibility. With evaluation and monitoring work spread across numerous emails, inboxes, and documents, it can be easy to miss critical information, particularly during crises.
Sourcing and procurement platforms simplify the management of supplier performance and supply chain stability. Centralized databases enable the capture of supplier data and compliance tracking, enhancing visibility within the supplier-management ecosystem. Streamlined processes minimize workload and save valuable time for procurement teams while decreasing the potential for human error.
The advantages go beyond risk management. By digitizing procurement processes, organizations can identify, evaluate, engage, and monitor suppliers, allowing them to measure progress against key business priorities like supply continuity, environmental, social, and governance (ESG) performance, and innovation.
PLAN FOR PIVOTS
In order to adapt to unexpected and disruptive events, companies must incorporate agile and flexible procurement strategies.
Although the concept of “agile procurement” is not new, it has gained more traction since the COVID-19 pandemic, despite critics like Bill Gates and Nassim Taleb who argued that such an event was entirely predictable.
The advantages of agile procurement include the ability to make informed decisions more quickly, provide greater flexibility for negotiation with partners, improve processes and introduce new technologies, enhance stakeholder accessibility and usability, and implement responsible strategies based on real-time metrics.
This approach avoids the excuses of “that’s the way we’ve always done it” and promotes a more adaptable and flexible procurement strategy.