Resources | Supply Chain Management | 28 September 2022

5 Supply Chain Risks That Could Lead to Even Bigger Problems

Don’t wait until a supply chain risk becomes a full-blown crisis. Take action now.

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Don’t wait until a supply chain risk becomes a full-blown crisis. Take action now.

It’s so easy to ignore seemingly small problems, especially when you’re busy juggling a million other tasks. Unfortunately, those little issues have a bad habit of metastasising into crises. And that’s especially true of supply chains.

After all, hundreds of people have to do hundreds of things right, on deadline, for your supply chain to deliver products on time and in sufficient quantities. Something as small as a grease fire has the power to delay or even derail your operations.

While you can never completely eliminate supply chain risk, there are things you can do to lower the odds that you face a major catastrophe. Here are five examples of the most common risks.

Examples of supply chain risk

1. Not producing data-driven demand forecasts

Demand forecasts guide retailers as they place orders and help their suppliers develop their own production schedules. While no forecast is ever perfect, the more accurate that a forecast is, the better. Otherwise, it raises the risk that a supply chain will deliver too much (or not enough) of an in-demand product.

The good news is that more companies are using enterprise resource planning (ERP) tools or homegrown solutions that can incorporate multiple data sources to guide the forecasting process. A great example is IKEA, whose AI-powered Demand Sensing tool looks at 200 different datastreams to predict customer demand at least four months in advance.

Unfortunately, a lot of retailers still use spreadsheets for their demand forecasting. While spreadsheets can be useful for a lot of things, they have a more difficult time incorporating historical data required for prediction.

2. Failing to create an end-to-end view of the supply chain

It’s essential to create a complete view of your supply chain, from the companies that produce raw materials and inputs all the way through to the Tier 1 suppliers that deliver parts or inventory to your organisation.

Having this kind of information can be useful to optimise supply chain practices. It can also help you identify potential problems faster, whether that’s a supplier with illegal hiring practices or a partner whose factories could be taken offline for weeks due to a major hurricane.

For basic supply chain mapping, you should start by identifying stakeholders for each stage of your supply chain. (It can help to get input from other departments in your organisation, so you don’t overlook any suppliers.) Where are they located? Who are the key points of contact? What value do they add, and how much does it cost? How long does it take each link of the supply chain to do its part?

There are new software solutions that can help map all the links in a supply chain, but the crucial ingredients are actually communication and trust with your vendors, who must be willing to share information about their suppliers, too.

3. Relying on too few vendors (or too many)

It’s been one of the biggest lessons of the past few years: Relying on just one or two suppliers for an essential step in your supply chain might be more efficient, but if there’s an unexpected crisis — like a pandemic-related lockdown or a natural disaster — it could be enough to drastically slow or even shut down your supply chain.

As a result, more procurement teams are diversifying their suppliers, making sure they have multiple ways to get what they need. According to a 2022 survey from McKinsey & Co., 81% of surveyed supply chain leaders are pursuing a dual-sourcing strategy, up from 55% a year earlier.

Many companies (44% in the McKinsey & Co. report) are also investing in regionalised supply chains — that is, using clusters of suppliers that operate in the regions where the finished products will ultimately be sold. That way, if there’s a disruption in another part of the world, these regionalized chains can continue to function.

One thing to note: Diversification can be taken too far if the supply chain becomes too big to manage. Gartner has found that enterprises with large, sprawling supply chains may be increasing their risk because there are simply more opportunities for things to go wrong. A better solution, they argue, is to create chains that are diversified, but still small enough to be “hard targets” against potential disruption.

4. Failing to support vendors financially

It can happen even to the best-run suppliers. Disaster strikes and a key piece of equipment must be replaced now, then an unexpectedly big order arrives, and suddenly, the company is in a cash crunch. Smart enterprises do what they can to ensure their most important suppliers can remain financially stable and have access to working capital, so those suppliers will be around to serve them in the future.

One of the best ways to support your suppliers is to pay your invoices early. It gives your suppliers an immediate injection of cash that can be used to reinvest in inventory or raw materials, or even just meet payroll and keep the lights on. Even better, most suppliers are happy to give you a discount in exchange for early payment.

Today, there are a wealth of tools that can be used to accelerate payments while also benefiting your enterprise, whether that’s dynamic discounting or supply chain finance. C2FO, for example, has a full suite of working capital solutions.

5. Ignoring ESG and sustainability during challenging times

For too many enterprises, their environmental, social and governance (ESG) initiatives are still a “nice to have.” They might offer special terms to suppliers that adopt sustainable practices, but at the first sign of trouble, those companies will end support for the programme. That’s a mistake, for two reasons.

For starters, ESG programmes are most effective when they’re consistent. You can’t expect suppliers to invest in, say, green energy or environmentally friendly packaging if the incentives may or may not be there.

Secondly, encouraging ESG policies can have a real payoff in financial terms. The solar panels that your suppliers installed could help them survive when the energy sector hikes prices to record highs — or even allow them to compete on price since their energy costs may be lower than competitors’. That environmentally friendly packaging could serve as a differentiator and help you increase market share.

The bottom line on supply chain risk

Don’t wait until your supply chain is in trouble. By recognising potential weaknesses now, your team can start diversifying your suppliers, creating an end-to-end view of your supply chain and putting programmes into place to assist your suppliers financially.

Looking for a faster, more efficient way to offer early payment to your suppliers? Learn more about C2FO’s suite of working capital solutions.

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