Organizations that have aligned their business models to reduce costs and operate “lean” are rethinking their approaches and focusing more on risk management and building long-term resilience. For help, these companies are turning to technology to gain better insight into their supply chains; identify and respond to risks before they even occur; and to create stronger, more sustainable global networks that can withstand minor shocks and respond quickly to larger ones.
In building more resilient supply chains, companies need accurate data and modern visibility platforms that support good decision making. In the absence of these tools, supply chain risk management is performed on a one-off, reactive basis – something the pandemic has proven doesn’t work in today’s uncertain business environment.
Most significant disruptive events of the past two years
Koray Köse, Senior Director, Analyst of Supply Chain Research and Advisory at Gartner, Inc., says that 83% of companies want better supply chain visibility and 64% want to be able to extract more accurate and reliable data from these networks . He says that many larger companies (i.e., those with annual sales of $1 billion or more) already have both of these boxes ticked, but adds that supply chain visibility decreases significantly as the tier of suppliers increases.
For example, Köse’s most recent research shows that more than 80% of companies have a good insight into the activities and status of their Tier 1 suppliers, but this percentage drops to 36% for Tier 2, 21% for Tier 3 and 19% for Tier 4 To close these visibility gaps, get more accurate data and avoid risk, companies use compliance and audits; financial evaluations of suppliers; and supplier performance scorecards.
When it comes to supply chain risk monitoring and supply chain visibility tools, 20% of organizations currently use the former and 11% rely on the latter, according to Köse. However, the pandemic, semiconductor shortages and other current events are prompting more and more companies to invest in and use these tools.
In fact, 64% of companies are currently evaluating or implementing supply chain risk monitoring tools and 73% are doing the same with supply chain visibility and multi-tier mapping applications (to gain better visibility across Tier 2, 3 and 4 suppliers).
“We are currently seeing many companies trying to gain more insight into their entire supply chains and to use supplier risk data as an effective tool for overall risk management,” says Köse. “When companies realized they didn’t have visibility, it basically led to a deluge of technology investments, particularly in supply chain visibility, tiered mapping and monitoring of risk events.”
Smaller companies are decidedly less proactive when it comes to identifying and addressing risks before they materialize. Not only does this affect them, it can also bring a much larger customer to its knees – especially when that customer’s supply chain visibility ends at the Tier 1 supplier level. “Smaller companies deal with emerging issues that can create significant misalignments in the supply chain where every large company relies on smaller suppliers,” explains Köse.
According to Köse, even if your company is proactive and the supply chain works in reactive mode, you don’t really have much room to improve risk management. “Smaller companies may be governed less strictly if your volume of business with these suppliers is lower,” he adds. “The problem is that these Tier 3 or Tier 4 suppliers can shut down the entire supply chain. Suddenly you have a problem at hand.”
Supply chains are the focus
The interconnectedness of our global societies and technologies has made risk management in the supply chain more complex than ever. Any crisis management approach that only considers a single aspect of the overall system may miss a possible chain of events that need to be considered. From the pandemic to labor shortages to rapidly changing global trade regulations, businesses need to continuously think, analyze, evaluate and plan
These realities have put the supply chain in the spotlight, making good risk management more important than ever. “Amidst all the changes and disruptions that have taken place over the past two years, supply chains are taking center stage,” said Shruti Gupta, Senior Manager and Industrials Senior Analyst at RSM US LLP. “Now organizations are building capabilities to manage all of these changes.”
According to Gupta, the problem cannot be solved overnight, but overcoming it is fairly high on most companies’ agendas these days. Manufacturers are particularly keen to invest in tools and applications that help them build more resilient, impact-resistant supply chains.
Disruptive demand management is an area these companies are most interested in, knowing that demand signals and traditional forecasting methods were “not up to the task” during the pandemic.
“Companies are thinking, looking, and exploring how to make better forecasts and incorporate many more variables and data forecasting methods into their approaches,” says Gupta. So where in the past a manufacturer would have their own internal data to create a 3- or 6-month demand forecast, the same company now pulls external third-party data and short-term data variables into the mix. The aim is to develop more robust algorithms and forecasting models that generate more accurate and reliable demand signals.
“Once you know your demand variability, you can
Apply it to different product categories and
Set metrics like order quantity and safety stock
Levels, lot sizes and so on… Any of those metrics
can be customized to each part, which is crucial
because only a single part (e.g. a semiconductor)
can stop the entire supply chain.”
— Shruti Gupta, RSM US LLP
Technology, of course, plays an important role in these developments. In addition to the risk management and visibility software itself, advanced technologies such as artificial intelligence (AI) and machine learning (ML) help companies create comprehensive, accurate models. These models can be used to better predict demand signals and predict demand variability.
“Once you know your demand variability, you can apply it to different product categories and set metrics like order quantity, safety stock, lot sizes, etc.,” explains Gupta. “Each of these metrics can be customized for each part, which is critical since just a single part (say, a semiconductor) can stop the entire supply chain.”
moving the needle
As she examines the current business landscape, Gupta says that investing companies “are in a better position to move faster,” while those clinging to more manual risk management approaches may struggle to catch up.
The pandemic moved the needle as it sent sweeping waves of disruption through global supply chains, but Gupta says there is still work to be done in this area.
“Many small to medium-sized businesses have not kept pace with technology investments and are still using outdated legacy systems and distributed, disconnected solutions,” Gupta emphasizes. “When you have these types of systems in place, it’s difficult to make the necessary advances. However, thanks to the pandemic, more companies are saying, “Okay, now we need to start investing in the technology.” So we’re starting to see that happen.”
Supply shortages of key raw materials or components are the risk/disruption of greatest concern for companies over the next 2-3 years
For example, Gupta says supply chain control towers, which capture data across the network and collect it in one place for easy information sharing, are becoming increasingly popular. Once in place, these platforms also provide organizations with the predictive and prescriptive capabilities they need to turn around and deal with disruptions.
Gupta also sees more companies adopting regional supply chain models and says just-in-time (JIT) inventory management models aren’t exactly “dead,” but she sees more companies increasing their inventory buffers to cope
From his perspective as director of Rider University’s Global Supply Chain Management Program, former supply chain expert Tan Miller says companies are showing greater interest in software that provides a high level of supply chain visibility.
“If you can’t see the risks, it’s a lot harder to prevent or prepare for,” says Miller. “Supply chain technology improves every year in terms of the visibility it provides across the supply chain.”
This takes time and resources, but Miller says companies see value in adding new capabilities to their existing enterprise resource planning (ERP) planning and other solutions that open the doors to better visibility and, consequently, improved risk management.
“It was recognized that this type of investment cannot be postponed,” says Miller, who sees risk management as an ongoing effort rather than a one-time event. “I expect companies will learn and bet more and more as time goes on
greater preventive efforts
Köse estimates that by 2025, half of all companies will have a dedicated supply chain risk management function that is both supported and funded by the overall organization. The other 50% of companies are lacking in this area, and this presents a real opportunity for software vendors who are constantly refining and improving their solutions to meet their customers’ needs.
“When organizations realized they didn’t
Having visibility, it basically created a frenzy
of technology investments, and in particular
Supply chain visibility, multi-tier mapping and
Risk event monitoring.”
— Koray Kose, Gartner
Referring to the high percentage of companies currently evaluating or implementing supply chain risk event monitoring, supply chain visibility, and multi-tier mapping applications, Köse says software vendors with a focus on risk management are well-positioned to help companies do this to either develop new solutions from scratch or replace the ones that don’t work.
“Within two years, companies will realize that the tools they implement don’t really solve their problems and don’t create transparency in their supply chains,” says Köse. “For vendors, the opportunity is split fairly evenly between companies looking for new tools to replace the tools they’ve invested in and customers still looking for the right solution.”