A Step-by-Step Guide to De-risking Your Supply Chain in Uncertain Times
I remember vividly the first time I felt how sensitive supply chains can be. I was on my first post as a US diplomat when I was told that my air shipment would be delayed — with no firm sense for how long. A volcano in Iceland had disrupted air travel, and no one was quite sure how long it would be before things were back to normal. I faced mild inconvenience, but a disruption at that scale could be costly for the thousands of businesses that depend on air shipments for survival. Every business needs to map its supplier network and mitigate risk where feasible. Here’s my step-by-step guide based on my global experience and academic work for my MBA at London Business School.
1. Conduct a thorough assessment and build a map
Before any mitigation can be implemented, a business needs to have a clear snapshot of its current suppliers. This is relatively simple for some firms — if you sell custom T-shirts, perhaps you work with two suppliers in different geographies and have a backup. But, mapping your suppliers could be time-consuming if you build a product based on inputs. To get started, you could look through previous delays and identify weak points, moving through your list in that order. Or you could engage temporary outside help to do the initial research. You’ll want to move beyond the obvious and go one layer deeper.
For example, rather than a simple spreadsheet that lists the parts you need and the supplier of those parts, go one layer deeper and see if that supplier has its own supplier list. Sophisticated electronic parts are often built this way, with one supplier creating a circuit board but depending on several others for processors. If you’re at the end of this chain, you’ll want to assess the circuit board maker and the chip supplier for a complete picture. Having your front-line employees involved in this process will be key — they will likely have the information you need to build an accurate diagram of your supplier network.
When building your maps, gather key metrics to help you create a strategy, including supplier lead time, inventory levels, and supplier performance (such as adhering to commitments and quality).
2. Diversify your supplier base
Few businesses can afford a single point of failure in their supply chain. As I write this, persistent drought in Central America has led to record low water levels in the Panama Canal, disrupting shipping and sometimes doubling lead times, and in 2021, a ship grounded in the Suez Canal, adding to an already chaotic year for supply chains. Add to that local extreme weather, geopolitical risk, and economic shocks, and it becomes clear that rare phenomena, in the aggregate, become common. Put another way, if you build a consumer product and rely on 17 different suppliers for parts and maintain production consistency for five years, your true annual exposure to disruption is a multiple of your complexity and duration. This means you will likely see a 1 in 100 event over a five-year period (the author Jared Diamond illustrates this well in a 2013 op-ed).
Besides the obvious need to find alternatives to single suppliers, look at the rest of your supplier base and pay specific attention to the risk of disruption from natural disasters, logistics, and geopolitics. For example, if you depend on a Southeast Asian manufacturer for microchips, you could rate the sensitivity to each category. The supplier’s country could be stable, meaning it would have a low geopolitical risk score, but it might be far from your production facility, meaning it would have a higher logistics score. It might also be prone to typhoons, meaning it would also warrant a high natural disaster score. When creating these rubrics, a data-forward approach is key — rather than intuition, make sure the scores are based on metrics from the same independent sources.
3. Strengthen your relationship with suppliers
We know from decades of behavioral research that purely transactional relationships are weaker than those based on common ground. This might seem overly sentimental for a business to consider — after all, the very definition of a marketplace is that personal relationships are optional, not required, to transact. Yet a look at famous Harvard Business School case studies shows the power of having a close working relationship with your supplier.
One such case study from HBS looks at Toyota’s manufacturing practices in the 1990s, emphasizing its relationship with a seat supplier for the Camry, the single most expensive pre-built part that the car contained. The case outlines how a close working relationship with the supplier was key to reducing waste and increasing efficiency. Toyota integrated its assembly line system with the seat supplier’s ordering queue, meaning seats were dispatched from a warehouse on demand, reducing storage costs at the assembly line.
As Toyota does, even smaller manufacturers can build long-term relationships with key suppliers. This may not necessarily mean integrating computer systems, but it could involve sharing information in general. The human factor is often overlooked — in the end, companies are simply groups of people. Having a personal relationship with the right folks in your supplier’s organization could mean the difference between getting the parts you need on time or being placed at the end of a queue.
4. Build forecasts and design contingencies
Creating accurate forecasts ahead of supply orders is no small feat — it plagues the entire manufacturing industry and leads to the bullwhip effect. In essence, small changes in demand from the end consumer cause massive waves further up the supply chain. For example, Procter and Gamble saw small and random fluctuations in demand for pampers would lead to bigger changes in orders from their distributors and even bigger changes in orders from their own suppliers of materials. This plays out in the travel industry as well — small shifts in consumer demand lead to huge shifts in the supply of airline seats and hotel rooms, leading to a glut, a contraction, and an over-correction, followed by a shortage, and another over-correction with increased supply, repeating the cycle. Despite the difficulty of building accurate forecasts, you should still attempt to model your future supply needs and balance resilience with costs.
Information sharing with your suppliers could boost efficiency and a way around the bullwhip effect. If you understand your supplier’s lead times and stock level, and they have access to your sales data, you have a better chance of having the right mix of stock on hand and in the delivery pipeline. Integrating data sources with your suppliers could also be a competitive advantage by raising the bar new market entrants would need to clear. Exclusive and preferential supplier agreements are another method of gaining a competitive edge, though they need to be well thought through on the supplier end of the agreement.
De-risking your supply chain is no simple task, and much of it will be tedious, from gathering the right data to flying to remote factories to searching for suitable alternatives. Yet this tedium is exactly what will set your business apart from your competitors who haven’t put in the same detailed work.
