06 February 2019

Six steps towards reducing supply chain risk

Is it ever possible to have a supply chain that’s both cost-efficient and resilient to change and disruption?

From floods to the impact of Brexit uncertainty, events of the last few years have shown that supply and distribution networks can be vulnerable, but also that there are opportunities if companies can become faster at adapting to change.

Outsourcing goods and services, ever-wider global sourcing, reduced inventory, offshore manufacture, product customisation or centralised distribution – all these strategies are carried out with the best intentions of concentrating on core strengths. But it may be time to rethink these accepted best practices to build leeway into the supply chain and reduce risk.

Six steps to a well-balanced supply chain

  1. Build in flexibility
  2. "Brexit is a good example of how unprepared we are for changes in supply," says Dr Martin Christopher, Emeritus Professor of Marketing and Logistics at Cranfield School of Management. "It's alarming that the response has been to stockpile inventory that might never be needed rather than make ourselves adaptable to circumstances."

    He suggests companies need "structural flexibility" – the ability to quickly change the shape of their supply and demand network.

    "Rather than investing in or owning assets, we could be looking to forge alliances that let us access capacity and share facilities as needed," says Christopher. "It means working with customers, suppliers and even competitors. It's the only way to cope in a world that's more unpredictable than ever."

    He cites the example of airlines that share inventories of spare parts rather than holding stock in their own warehouses.

    "Ideally, you don't want to be sitting on finished inventory, but rather hold material in generic form. Think of a DIY retailer, where paint is kept ready to be mixed to the right colour rather than stored in its finished state.

    "I believe we need to move away from the single-source supply we've inherited from Lean practice to having more flexible arrangements, which means asking questions about holding inventory – what, who, where – and should I be sharing it."

  3. See the whole picture
  4. Few companies have much visibility of the supply network beyond the first level of suppliers and their own customers.

    To achieve supply chain visibility, you need to collaborate with customers so you can see demand and market trends. And you need to collaborate with suppliers to synchronise planning and enable alerts for possible disruption.

    It's important not to forget the internal picture too. A major barrier to visibility can be your own structure, where 'functional silos' can stop information flowing and lead to poor communication.

    Openness is essential, according to Alan McKinnon, Professor of Logistics at Kühne Logistics University and a moderator on the OECD's International Transport Forum roundtable on resilience. But, he warns, some companies repay their suppliers' transparency about risk by shopping elsewhere.

  5. Spot the danger signs
  6. "There are now many ways for a company to use IT to scan the external business and physical environments for potential risks," adds McKinnon. "For example, by monitoring available financial, stock market and weather data, you can get early warning of potential supply chain disruptions."

    And he suggests making use of the audit and advice services offered by many logistics companies, such as DHL, and by supply chain risk insurance companies such as Allianz and Zurich.

  7. Increase your speed
  8. It's makes sense to speed up the time it takes for materials or products to move 'end-to-end' but, says Christopher, as well as velocity, you need acceleration in how the supply chain can react to changes in demand.

    To improve velocity and acceleration, he recommends companies do three things – streamline their processes, reduce in-bound lead times and cut the non-value adding time.

    Streamlined processes work in parallel rather than in series, he says, and they're designed around minimal batch sizes – order quantities, production batch sizes or shipping quantities. The emphasis is on flexibility rather than economies of scale.

    Reducing lead times comes down to supplier selection, but also to synchronising schedules with suppliers. Cutting the non-value adding time means looking at where processes add nothing for the customer – goods sitting in a warehouse, for example.

When a company can factor in the financial consequences of potential disasters – monetising risk – they start to see resilience as part of the efficiency drive.

Alan McKinnon, Professor of Logistics at Kühne Logistics University
  1. Cost the risk
  2. While improving resilience appears to put a brake on some cost-efficiency measures, it can cut costs in the long-term.

    "It's far from easy to cost the effects of a crisis and, with short-term sales targets, risk and resilience drop down the agenda," says McKinnon.

    "But, when a company can factor in the financial consequences of potential disasters – monetising risk – they start to see resilience as part of the efficiency drive."

  3. Recover and rebound
  4. Some disasters will happen, however well-prepared a company and however flexible the supply chain. The loss of a supplier, extreme weather – or even Brexit – can all bring disruption.

    "The key is to have a plan that lets you bounce back as quickly as possible," suggests McKinnon. "This is a management system that should kick in whenever an event occurs, with well-understood lines of communication and action points. This isn't something to be left in the back of a cupboard, but should rather be the subject of regular briefings so that the plan can be applied at very short notice."

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