Poor Visibility Puts a Majority of Organizations at Risk for Supply Chain Disruption

Supply Chain Disruption

The majority of companies that experienced a supply chain disruption in the last year cited either a tier 1 or tier 2 supplier as the predominant source of the disruption, according to 2015 Supply Chain Resilience Report from the Business Continuity Institute and Zurich Insurance. Half of all respondents in the report cited a tier 1 supplier, the immediate or direct supplier, as the major source of the supply chain disruption and an additional 21% cited their tier 2 supplier, the supplier of the OEM’s tier 1 supplier.

The report also showed the majority (72%) of organizations lack full visibility into their supply chains. What is troublesome, too, is that nearly 1 in 10 (9%) of the more than 500 companies surveyed for the report do not fully know who their key suppliers are. This can no doubt make supply chain risk management even more difficult for firms that lack proper oversight on who exactly their suppliers are.

According to Thomas Kase, vice president of research at Spend Matters and an expert on supply chain risk, sometimes companies lack quality visibility and have a fragmented picture of their suppliers and what they deliver.

“The end result is a foggy mess,” Thomas said.

For instance, a larger organization with several business units and multiple ERP systems may have multiple records and duplicate entries on a single supplier, either on purpose or due to sloppy documentation practices. A widespread issue, Thomas said, is when a company’s record keeping on the payments side is not granular enough to show detail on what a supplier actually provides.

This is where spend analytics delivers significant value for procurement, Thomas said.

“Cloud-based spend analytics solutions have great potential to deliver substantial value-add in this process from repeatedly cleansing spend data across large sets of customers and their numerous suppliers,” he said.

Another step to improving supplier visibility is properly tackling how a procurement organization goes about setting up new supplier records to avoid duplication and other issues, Thomas pointed out. It is also important to avoid partial and/or duplicate SKU records, which can make it more difficult for an organization to purchase the right item.

“This is, in turn, tied to procure-to-pay systems, that have the ability to really cut through the fog and close the loop between requisitioners and actual items purchased, without loss of line item level information,” Thomas said.

Organizations Unaware of Business Continuity Plans

Being able to identify key suppliers leads to better practices within the organization, the report stated. About a third of organizations said identifying key suppliers is in an indicator of firm-wide reporting of supply chain disruption. Another third of organizations said identification is an indicator of a high level of top management commitment to supply chain resilience and 44% said identification leads to better insuring of supply chain losses.

Not only knowing who your key suppliers are but also how those suppliers will respond in the event of a significant disruption is important. The report showed 60% of larger organizations ask their key suppliers about business continuity plans. Small to medium-sized businesses, however, are less likely to ask about these plans — less than half (45%) reported having visibility into their suppliers’ business continuity arrangements. But simply asking about business continuity plans is not enough. While 60% of larger companies are asking their suppliers about these plans, 56% are not asking about business continuity arrangements, the report stated.

Additionally, the report showed 54% of SMEs have business continuity arrangements, while 74% of large business have business continuity plans. However, overall, business continuity arrangements have declined in the last three years. While 68% of companies overall, regardless of size, have plans in place as of 2015, last year that number was 72% and in 2013 it was 75%, showing a 10% drop in recent years.

“This represents a worrying trend as organizations without BC arrangements are less likely to engage in firm-wide reporting of supply chain disruption, insure their losses and exhibit top management commitment to resilience,” the report said.

Thomas echoed those concerns.

“In addition to the spend mismanagement risk, the potential business continuity issues from a weak understanding of the legal and financial health of suppliers, including their physical location, points to a need to look at global supply chain risk management, which incorporates geopolitical updates, social media alerts and other information that is critical when selecting suppliers and managing the ongoing relationship,” Thomas said.

Financial Impact of Supply Chain Disruptions

Supply chain disruptions, such as a cyber attack or natural disaster, can lead to significant financial losses for an organization. A total of 14% of organizations in the report stated they lost more than $1 million due to multiple supply chain disruptions in the last year. Nearly 10% said a single incident cost them more than $1 million in losses.

A separate report focused solely on the cleantech industry, which includes recycling and renewable and green energy, showed supply chain disruptions lead to bottom line losses 84% of the time. The 2015 Global Cleantech Risk Survey by Chubb Group of Insurance Companies and Cleantech Group, showed 69% of respondents said supply chain disruptions in the industry caused delayed deliveries, 28% cited lost profits, 27% cited damage to their brand and reputation and 26% a reduction in revenue.

The Chubb report also urges organizations to improve due diligence of their key suppliers by asking about business continuity plans and understanding who not only tier 1 suppliers are but also achieve deeper visibility of tier 2 suppliers.

In some industries, such as automotive, where supply chains are specialized and include multiple tiers, it’s important to look even further, perhaps as far back as tier 4, Thomas said. Gaining a higher level of visibility also makes incorporating supply chain analytics and big data easier. Solid sourcing basics are still important, but incorporating data into the supply chain process allows procurement to make better decisions and create effective mitigation plans in case a supply chain disruption occurs.

“This is the opportunity that comes from good data,” Thomas said. “But as the reader can see, it requires addressing several pieces to put the visibility puzzle together.”

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