Back-up Sourcing: Preparing for the Unexpected
With globalization taking hold, managing supply chains has become more complex than ever, prompting companies to optimize their sourcing strategies and create back-up plans for unexpected events.
Supply-chain disruptions and delays not only have a negative impact on a company’s ability to satisfy orders, but may also damage a company’s brand reputation and stock price, and can even threaten the health of consumers. In fact, as reflected in the 2013 Global Supply Chain Risk survey conducted by Deloitte, global executives are increasingly concerned about the growing risks to their supply chains, with 53% of the 600 interviewed executives saying that supply-chain disruptions have become more costly over the last three years.
Growing supply-chain risks
In an environment rapidly becoming more global in nature, natural disasters and extreme weather conditions such as earthquakes and hurricanes are always a threat to supply chains, while terrorism, geopolitical unrest, cyber crime, trade regulation, currency exchange rates and supplier dependability are also critical factors that may affect the stability of supply chains.
The fact that supply chains are getting leaner and longer, as well as their interlinked nature, makes them more vulnerable to a wide range of risks. In the old days, inventory can act as a buffer to allow more time to deal with unexpected events occurring in the supply chain. A leaner and longer supply chain eliminates inventory that makes the handling of unexpected events and supply-chain inconsistencies more urgent and difficult to counteract.
In the meantime, it is now more common to see companies dealing with tight logistics capacity and raw-materials capacity as raw-material and energy prices have greatly increased over the past few years. The rising costs of insurance and trade finance make the situation even more severe. Given all these factors, the situation brooks no delay for manufacturers and distributors to act proactively and develop a contingency plan to cope with any unexpected supply-chain interruptions.
Mitigating the risks
There is no doubt that supply-chain contingency planning has become a significant issue for manufacturers and distributors. It is widely agreed that a well-designed-and-tested contingency plan, with back-up sourcing as one of the key components, can help mitigate the impact when the unpredictable strikes.
Since investing in supply-chain contingency planning can really make a difference, companies are advised to take some critical steps to build supply-chain resilience, so that the supply chains can bounce back from interruptions quickly to minimize losses.
Identifying a back-up supplier: It is important to have an alternative source to support in case of supply-chain interruptions. Hence, manufacturers and distributors should build relationships with one or more back-up suppliers instead of relying on one single source of supply.
Maintaining close relationships with suppliers: Good relationships and connections with suppliers are essential and can help manufacturers and distributors stay abreast of any changes or potential risks, so that they can make advance preparations to reduce the risks.
Data back-ups: It is vital to back-up all critical information, including customer records, emails, and financial data and store them offsite so that all is kept safe even when an unexpected event occurs.
Supply-chain insurance: Production delays or supply-chain cuts can cause great damage to a business and purchasing supply-chain insurance enables a company to offset the losses.
Finding a backup supplier
It is clear that, with increased volatility in the markets, companies really have to reshape their operations and make their supply chains more agile and adaptable. Rather than a total dependence on one key supplier, it is more practical to find one more supplier to act as back-up in the supply chain.
Factors which should be considered when selecting a back-up supplier include:
Availability and response time: Can the supplier be immediately available and respond to production requests in a short period of time, and meet production goals without delay?
Capacity and reliability – Is the supplier a reliable one who is capable of quickly taking up the mission in case a primary supplier fails?
Quality of product – How is the product quality? Does it meet your requirements? A supplier who produces quality products can help prevent products returns that may cause losses.
To ensure that the back-up supplier is reliable, buyers are recommended to include a supplier-auditing process in their sourcing strategies to regularly reassess suppliers' financial stability and market standing and perform a full risk assessment of suppliers, including their business-continuity plans, geopolitical exposure and their processes.
Buyers may also seek support from a third party to help source good suppliers. The advantages of leveraging a third-party platform for supplier identification are that it helps you identify a trusted supplier for assurance from hundreds of screened and verified global retailers and sourcing companies, while professional consultation services and capacity building tools are also provided, which enables users to stay ahead of the latest market trends with buyer insights and market updates.
The information collected and verified by the third party allows retailers and buyers to measure supplier performance more easily and partner with suppliers who are continuously upgrading their standards.
All in all, it is always wise to prepare for a rainy day. Companies that implement preparedness measures as part of a comprehensive sourcing strategy will be more capable of recovering from potential disruptions and other unexpected events, while gaining a competitive edge over others. Buyers, it’s time to come up with your own back-up sourcing plan!