Supply chain risk management strategies
If multinational corporations have learned anything in the past couple of years, it’s that supply chain disruptions can come from anywhere: climate change, pandemics, geopolitical tension (e.g. Brexit), terrorism, regulatory changes, shipping accidents, cyber attacks, sanctions—you name it. And because the dangers are so great and varied, companies are pursuing new supply chain risk management strategies, particularly in the areas of trade compliance, import/export screening, supplier evaluation, and post-entry audits.
In 2020, the COVID-19 pandemic was the primary cause of supply chain disruptions, followed by extreme weather events, cyber crime (e.g., ransomware), and transportation/logistics issues. That said, the total number of disruptions is also increasing. In a recent report on supply chain resilience by the Business Continuity Institute (BCI), 27% of organizations reported more than 20 supply chain disruptions during 2020, up from 4.8% in 2019—an increase of more than 500%!
Why companies need better supply chain risk management strategies
According to the BCI, 40.2% of COVID-related disruptions came from Tier 2 suppliers and below. That is, the disruptions were caused by entities far down the supply chain—from suppliers that the companies themselves knew next to nothing about and had not considered in their standard risk mitigation protocols.
Clearly, companies need better supply chain risk management strategies to avoid such unwelcome surprises. But too many companies still leave critical components of their supply chain to chance. In fact, only one in six organizations carries out due diligence on all key suppliers at the procurement stage, and a quarter fail to do so until after the contracts have been signed, when it is often too late.
Companies that fail to understand every aspect of their supply chain are inviting unexpected disruptions, not to mention the risk of fines, penalties, loss of import/export privileges, cost overruns, loss of reputation, and erosion of consumer trust. Given the various types of risk and possible consequences, the question then becomes: How can companies create more comprehensive supply chain risk assessment and business continuity programs to protect themselves from being blindsided by factors they failed to foresee?
Know your business partners: Supplier evaluation and selection
Though many kinds of risk are caused by events beyond a company’s control, the supply chain is a network of business relationships over which companies have a great deal of power and control, starting with the suppliers they choose to do business with.
It may sound obvious, but at the very least companies should know who their business partners are and whether they represent a potential weakness in, or threat to, the supply chain. Granted, many multinational companies have hundreds, if not thousands, of suppliers all over the world, but such diverse and complex arrangements only highlight the need for absolute transparency up and down the chain.
Know your business partners
As the saying goes, “you can’t mitigate what you haven’t identified,” so the first questions supply chain managers should ask themselves are:
- How well do you know your business partners?
- Are they reputable? Reliable?
- Do they reflect well on the company?
- Does their location or mode of operation represent any risks to the supply chain?
- If so, are those risks acceptable? Tolerable? Unavoidable? Mitigable?
Asking these questions is important because many consumers do not distinguish between a brand and its suppliers. So, for example, if it’s discovered that a company’s third-tier supplier is using child labor or somehow violating US sanctions, the negative publicity can do considerable damage to a brand.
Developing a comprehensive supply chain risk assessment program
To avoid such situations, companies should develop a comprehensive supply chain risk assessment program that makes intelligent use of software tools specifically designed to take the guesswork out of import/export risk and compliance.
For example, denied party screening software does the tedious work of comparing supplier information against multiple international watch lists, allowing procurement managers to identify potential “problem suppliers” before the contract is signed.
However, technology solutions that automate screening for denied or restricted parties, politically exposed persons, adverse media, sanctions, and other aspects of global trade are only as good as the quality of their lists—and those lists are constantly changing. For example, Thomson Reuters maintains more than 300 restricted party lists and regularly logs 350,000+ list updates per year in support of the company’s global trade management software. Trying to keep track of so many changes manually isn’t just impossible; it’s extremely risky.
Supplier assessments are another critical function that can benefit from automation. With supply chain compliance software, companies can automate supplier questionnaires, create immediate alerts for high-risk responses, and even issue corrective actions. Having a central repository also makes it easy to analyze and report on supplier risk criteria and best practices with the push of a button.
Of course, there is no guarantee that disruptions won’t arise in other areas, such as border declarations, regulatory changes, country of origin statements, tariffs, licenses, product classification, and other import/export requirements. Shipping and logistics can also cause problems, especially at borders and ports of entry, as can the need for product testing and other country-specific regulations, such as anti-dumping duties and rules governing free trade zones.
Indeed, every link in the supply chain contains a certain amount of risk, including the products themselves, which can be subject to tariffs, testing, licenses, permits, and more. Well before any product is shipped, then, it needs to undergo a thorough risk analysis. Ultimately, analytics and proactive global trade planning will help you improve visibility and avoid future supply chain disruptions.
Here are a few key questions you should ask yourself:
- Can the product be legally imported/exported to, through, and from the relevant countries?
- If so, what upstream details (e.g., licensing, permits) need to be anticipated?
- What tasks, costs, and risks will the product be subject to according to Incoterms rules?
- Is proof of origin required, and is the company’s record of proof accurate?
- Is the product subject to any retaliatory tariffs or duties?
- Have compliance requirements been double-checked before shipment?
- Are there security issues that need to be considered?
Conducting post-entry audits to uncover hidden supply chain risks
Another added layer of security can be achieved by conducting post-entry audits. These audits can uncover hidden vulnerabilities and other potential supply chain risks. They can also identify instances where duties or fees are over or underpaid, and give managers further insight into the true dynamics of the supply chain.
Again, import management software makes such audits much easier to conduct because the program’s reporting functions are typically designed to provide most of the relevant information. But even if a company isn’t using global trade management software (and according to the BCI, 42% aren’t), a cursory overview of the import/export process after the fact is a step in the right direction. That said, keeping track of all the possible pain points in any given supply chain is practically impossible without utilizing software, so relying on manual processes invites a certain amount of risk.
Top 10 supply chain risk mitigation strategies and best practices
It should also be understood that supply chain risk management in general is an ongoing process, not an occasional activity. Failing to monitor any part of the process opens the door to all kinds of risk—risks that can result in fines and penalties, loss of import/export privileges, personal fines, and even imprisonment. Therefore, it is imperative for companies, especially multinationals, to have the people, tools, and systems in place to ensure as secure, reliable, and efficient a supply chain as possible.
Implement these 10 best practices for supply chain risk mitigation today:
- Build an internal team with the right skills and secure senior management support
- Evaluate all suppliers in the chain, not just a few preferred ones
- Make risk evaluation an essential part of the supplier onboarding process
- Be able to map your supplier network for critical items, components, and services
- Tie supply chain mapping to threat data geographically in order to visualize potential issues (e.g., political unrest, tariff changes)
- Use a risk-based approach, but don’t use simple checklists—have a clear methodology
- Leverage threat data from multiple external sources and understand the consequences
- Evaluate the risk profile of all products being shipped
- Conduct post-entry audits of the import/export process
- Recognize that risk mitigation is an ongoing process, not a periodic chore
Leveraging global trade automation software to mitigate supply chain risk and manage by exception
Now, obviously, checking all of these details without the help of an automated global trade management solution would be prohibitively time-consuming and expensive. With comprehensive GTM software, however, all of these import/export factors and more (e.g., denied party screening, records, filings, data flow, licenses, tariffs, permits) can be programmed into the engine and monitored by trade compliance and supply chain personnel for alerts or other anomalies.
Indeed, the goal of global trade automation isn’t just to introduce necessary efficiencies into an extremely cumbersome process—it’s to reach a point where trade compliance and supply chain executives can “manage by exception.” That is, instead of trying to collect, process, and analyze all the information relevant to a company’s products, the software acts as a filter that only calls attention to suppliers, products, transactions, or details that look suspicious or out of character. If the system is continuously running in the background, trade compliance and supply chain managers are then free to focus their attention on proactively investigating alerts rather than trying to keep track of all the possible variables that might affect their supply chain.
To learn more, download our special report on how to mitigate risk in your supply chain.
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