Upstream Risk Management Gets Tactical

When suppliers are unable to provide much-needed components, perhaps because of weather events or other issues affecting their capacity, the supply chain comes to a screeching halt. That is, unless you can prepare ahead of time with upstream risk management.  

Tactical supplier risk management gives you the ability to understand current supplier risk exposure and its potential impact to your network. These insights can greatly boost your ability to limit production outages and manage commodity prices while staying compliant with regulations and limiting disruptions for your purchasing professionals.  

What happens at your suppliers flows downstream to you and eventually, your customers. This means effective upstream risk management adds benefits like reduced airfreight costs or improved on-time delivery to customers. 

Why You Should Manage Upstream Risks

Proper supply chain risk management can involve thousands, if not tens of thousands, of suppliers. And it grows ten times bigger once you start looking at your sub-tiers. One kink in the supply chain can have ripple effects that are hard to predict and even harder to mitigate, particularly if they aren’t anticipated.  

Unfortunately, not all suppliers are good communicators. They don’t always disclose an issue that could impact your business. Sometimes they may hope they can resolve it before it causes a problem. Others may not have the systems in place to recognize issues and notify every customer in a timely manner. Whatever the case, companies must be proactive in assessing potential supplier disruptions to understand these challenges holistically. In addition, it is also important to use risk scoring to understand forward-looking risk exposure of suppliers and leverage this across the whole supplier life cycle. 

Getting Insights for Upstream Risk Management 

How much transparency and insight do you have into your upstream suppliers’ performance? Are you relying on the supplier to keep you informed? To improve supplier risk management, companies must have ongoing, 360-degree vision.  

After your organization onboards a supplier, implementing a process that includes ongoing monitoring and analysis of internal and external risks will be key to making informed supply chain decisions or mitigation plans. Of course, it’s nearly impossible to know for certain every risk in your own environment, much less those of your suppliers. But many risks can now be spotted in advance, creating enough time to develop a plan to respond to those risks as they develop.  

Figure 1: Risks occurring during the Source and Plan stages can impact Make and Deliver, causing production stoppages and poor customer service.

Making Contingency Plans 

If you’re starting to make contingency plans, you’re in good company. For example, one leading global automobile manufacturer monitors many hundreds of its suppliers for weather hazards, among other risks. They understand that even if their suppliers don’t have contingency plans, their company must. If they believe one of their suppliers will be unable to supply, that triggers a business-continuity plan that is component-specific, and prompts engagement with the supplier. Actions can include buying up all existing supplier stock, expediting upcoming deliveries, or even acquiring the whole company. 

These types of proactive planning practices mean organizations can prepare for supplier issues ahead of time. They can either mitigate those risks or lessen their impact on their company’s ability to deliver product as expected. As such, the company stops the cycle of delays, restarts the supply chain flow, and reduces costs. They are doing more than just reacting too late. They become the hero, trusted to deliver when other companies may not be able. 

Independent of your supplier footprint, you need visibility not only into their risks that could impact your ability to deliver but also how critical each supplier is to your performance. Focusing on those suppliers that have an immediate, direct, and substantial influence on your operations will ensure your priorities are in the right place. Then, you can prepare for any disruptions by referring to whichever contingency plan best suits the situation at hand.  

A supplier interruption doesn’t have to mean your customers will feel it. Instead, creating risk-informed contingency plans will give your organization the ability to operate with agility. 

Implementing Rapid Response Mechanisms

So, how do you get supplier disruption insight? The first step is to perform a supplier risk assessment on your critical suppliers. By auditing your vendors’ processes, operating practices, financial health, and history of delivery, you can separate rare occurrences from trends. Keep in mind that manual assessments from supplier-provided questionnaires, procurement managers, and external sources can be combined with automated supplier risk assessments. Using advanced technology such as Artificial Intelligence and predictive analytics, companies can continually track supplier performance, providing real, historical evidence of how each supplier has met their obligations to your company.  

Supplier risk assessments can help you see the overall health and performance of your key suppliers so you can plan, and are invaluable when onboarding suppliers or reviewing supplier contracts. If you find a supplier is continually failing to meet expectations, you will have the necessary data to justify a conversation with the vendor or even award the contract to another supplier. 

A company can gain a competitive advantage when they can leverage supply chain predictability, mitigating disruption ahead of the competition. With insights readily available, business leaders can proactively make decisions on adjustments to optimize shipping performance.  

Plan for Upstream Risk Management Upsets 

Companies must operationalize the data they’ve collected to make risk predictions, then proactively plan. This practice is much more complex and reliable than depending on gut feeling or even repeating previous responses to supply chain interruptions. In fact, by using artificial intelligence and predictive analytics, companies can adapt their planning based on unique circumstances.  

For instance, if a hurricane at a supplier site looks like it could cause delays for a product urgently needed for production, a company can decide on a risk mitigation tactic.  But, even if a similar situation has happened in the past, the best response won’t necessarily be the same. That’s because you don’t base your response solely on the type of alert, but also on the type of component.  

The Importance of Material Criticality

Predictive analytics and a holistic view of material flow and final product value can prompt different responses. This new course of action can lead to improved outcomes. An important factor in your response is how critical your material is. Material criticality depends on:  

1. How substitutable the part is 
2. How long replacement times for the tools are 
3. How many alternate suppliers for the part are available 
4. How complex the entire supply chain is for the part 

This business continuity plan should be actionable, but leave room for deviations. The initial responses can be standardized, then guidance and best practices can be provided for later stages of the response. Especially in the resolution phase of a disruption, actions will vary from company to company because internal processes are very different. 

Automated supplier risk management means allowing technology to do the hard work of analysis instead of consuming resources and budget. The solution is much more capable of processing the large amounts of changing data required to inform relevant and timely predictions. By drawing from multiple data sources, or an existing data lake, automated insights can provide a holistic view of disruption risk and help create a rapid risk response to drive a competitive advantage.  

Supplier risk management doesn’t necessitate knee-jerk reactions to unpredictable events anymore. And it doesn’t require loads of manual work anymore, either. By automating your organization’s supplier risk response, and implementing Artificial Intelligence and predictive analytics, companies can make sure their upstream supply chains are running smoothly.