Managing Global Supply Chain Risk with Spend Analytics
As the world continues to become a truly global marketplace, “risk” is no longer simply defined by a company’s financial strength. While understanding key financial criteria about one’s vendors is still a very important element in understanding the risk of doing business with that vendor, there are a vast number of additional risk elements that would wreak havoc on the ability for the procurement organization to source and adequately meet their business’ demand.
There are many new and ongoing dynamic risk considerations that global companies face—such as geopolitical, climate, human resource/labor issues, and broader economic forces. Here we dive into a number of these factors and discusses how analyzing supplier performance can help manage and mitigate them.
- How supply availability is affected by these risk factors
- Why understanding supplier performance is critical, especially for project-based businesses
- What solutions are available to navigate risk—whether it is effectively responding to unforeseen global conditions or proactively addressing a changing environment to ensure the best pricing and highest availability
Robust solutions for dynamic environments
1. VISUAL MAPPING
A heat map provides a graphical reference of supply risk areas as they relate to user-defined criteria such as spend, suppliers and one or more risk factors (geopolitical, economic, labor issues, environmental, etc.).
2. DIRECT ACCESS TO AT-RISK SUPPLY
When a user clicks on a particular risk area (e.g., Poland; moderately risky, yellow) they are presented with a listing of categories/supply/suppliers/spend that are at risk in that region.
3. DETAILED INSIGHTS FOR CONTINGENCY PLANNING
By clicking again, users can obtain a full list of the suppliers and specific spend (and any other relative info desired) that is affected.
4. WAVE ANALYSIS
Executives can have immediate insight into the countries that present the highest risk to their supply chain. They can then drill into the details that comprise that risk. Figure 4 combines risk factors with a number of suppliers and spend to indicate the highest areas of risk.
As the world continues to become a truly global marketplace, “risk” is no longer simply defined by a company’s financial strength. While understanding key financial criteria about one’s vendors is still a very important element in understanding the risk of doing business with that vendor, there are a vast number of additional risk elements—many of which are much more dynamic and uncontrollable in nature than a company’s financials—which would wreak havoc on the ability for the procurement organization to source and adequately meet their business’ demand. There are many new and ongoing risk considerations that global companies face. We have outlined a few of these below.
The Japan tsunami of 2011 forced major global companies such as Toyota, Honda, Nissan, Nippon Steel and Sony to completely halt production, causing billions in losses. But while one might expect companies headquartered in Japan to suffer losses, the effect on the global market was even more overwhelming. By way of example, because two of the world’s largest silicon wafer manufacturers were located in the tsunami zone, 25 percent of the world’s silicon wafer production was affected, causing a devastating supply deficit for the global semiconductor industry.
The Suez Canal is a major waterway located in the Middle East, and it is the designated delivery route for a multitude of suppliers around the world. With the recent demonstrations and political upheaval in Egypt, Israel, Iran and several other countries in this region, supply chains relying on commodities passing through the Suez Canal are at significant risk of disruption. Many global organizations consider geopolitical risk in one of two ways: constant or dynamic. Constant geopolitical risk locations are comprised of countries or regions where there is a long-standing track record of political turmoil and related risk. Dynamic geopolitical risk is typically found in a country or region where there is not a history of turmoil. To fully manage the impact associated with geopolitical risk, organizations must consider, plan and manage around both types.
In this age of austerity, one only needs to look as far as the U.S. or Greece to see the global economic impact that a single country’s economy can have on an entire region, nation or currency. The impact of these outcomes is farreaching, and it provides one of the highest areas of risk for most global companies, resulting in a contagion of falling global markets and a freeze in lending. Understanding and navigating global economic risk comes from monitoring, mitigation and contingency planning.
In 2007, GM faced a strike by 73,000 UAW employees. While the financial impact was tremendous for GM, other casualties of this strike were the global suppliers of GM who employ millions of resources in support of GM. As the world has continued to evolve into a global community, human resources have played a key role in supply risk. Whether it’s potential strikes or the impact of law suits that result from human rights violations, the human resource element of risk has been at the forefront of many business and revenue disruptions.
Lean supply chain management initiatives have created a global environment where companies are highly concerned with both the future price of raw materials and the availability of those raw materials when needed. The up and downstream impact of the pricing and availability of raw materials is one of the core drivers of the success or failure of many companies. In an ever-changing global economy, managing the fluctuating demand and optimizing pricing is only part of the equation. Having immediate insight and access to the sources of available supplies—given how these are constantly changing—is critical.
Supplier performance is critical to every business, but for project-based businesses, it’s life or death. In sub-sea engineering, missing a deadline by a few days not only affects your reputation and makes your customers extremely unhappy, it can result in millions of dollars of lost revenues and/or incremental costs. Understanding performance (both internally and externally from suppliers) can be the difference between delivering a project on-time and on-budget or losing any minimal profit margin that might remain. As such, many companies can’t afford to treat performance as an afterthought, but rather, use performance— or lack thereof—as the primary driver for managing risk across their enterprise. At JAGGAER, we’re helping customers navigate and manage the many faces of risk. Whether it’s immediately and effectively responding to unforeseen global conditions and how they affect your supply or proactively addressing a dynamically changing international commodities market to ensure the best pricing and highest availability, we can help you reach your goals.