How to Manage Supply Risk in Uncertain Times
Although disruptions are inevitable, transportation management teams are often not prepared to respond. Organizations that can quickly anticipate, diagnose, and resolve supply disruptions will be in the best position to weather future storms.
Case in point, as shippers geared up for the 2016 holiday season, most had no way to anticipate the massive breakdown in ocean shipping capacity resulting from Hanjin’s abrupt bankruptcy and liquidation. Transportation managers had done little to prepare their networks for this turmoil. This event put into sharp focus the need for shippers to understand the potential risk to their supply chains inherent in their logistics partners and to build a well-balanced portfolio of partners offering the best mix of reliability, service and cost. Now leading shippers proactively track the financial risk of their ocean carrier(s).
A Pragmatic Approach Can Capture Powerful Insights
A.T. Kearney’s most recent Assessment of Excellence in Procurement Study, benchmarking procurement practices across more than 600 global companies, identified those procurement leaders that have invested in the capabilities and risk-management programs to manage the risk in their supply chains.
Importantly, these leaders consider risk as a Key Performance Indicator (KPI) when making logistics decisions—so they both reduce cost and manage risk when allocating awards.
A common way to manage supply risk in logistics is the multi-award strategy. Carriers’ safety records and references are assessed and scored during the evaluation and award processes. A collaborative optimization toolset and process is used to score and transform carrier proposals according to their risk score. Routing guides for shipment execution are set up, executed, and monitored with the carrier risk profile in mind. For example, less risky carriers are awarded critical customer lanes.
According to our research, 78 percent of typical companies and 90 percent of procurement leaders expect their supply management organizations to be given more responsibility for managing risk in the next two years. Furthermore, 83 percent of all companies see a growing need for their organizations to implement a procurement risk management strategy within the next three years. As a result, most are investing in risk management practices linking procurement, category, and supplier management strategies.
While developing risk mitigation is important, most supply management organizations will not have the capacity and bandwidth to address all potential risks, making prioritization crucial. The best solution for tackling the second-tier risks is ensuring that the organization is agile, flexible, and armed with the right tools to address risks when they emerge.
For most organizations, it is not a matter of if but when a supply disruption will occur. Although most acknowledge this, few have invested in the systems and programs needed to respond. Luck eventually runs out. Supply managers who have prepared their organizations to quickly identify, diagnose, and resolve eventual disruptions will be in the best positions to weather the storms.
About the Authors
Carrie Ericson, vice president, A.T. Kearney Solutions, San Francisco
Michael Zimmerman, partner, A.T. Kearney Solutions, New York
Sonali Agarwal, director, A.T. Kearney, New York