Events such as a ship stuck in the Suez Canal, the pandemic, the Ukraine war, inflation, and climate disasters, as well as burning factories with inadequate protections for employees, have clearly demonstrated the vulnerability of supply chains and our responsibility for human and environmental rights. A company’s ability to manage these challenges while meeting legal requirements has become a crucial competitive factor. In this article, I will look at the main challenges in designing resilient supply chains and how supply chain risks can be minimised through the use of smart, data-based solutions.
The importance of data in the design of resilient supply chains
Data plays a critical role in creating and sustaining resilient supply chains. Companies that have accurate and comprehensive data are able to respond quickly to changing market conditions. In particular, data is indispensable in identifying and assessing risks. By knowing their business partners better and assessing information about them, companies can identify risks at an early stage and take appropriate measures to prevent bottlenecks and production stoppages.
Risk analyses for value chains
To identify risks in value chains, I recommend taking a risk-based approach. Where are the biggest risks in my value chain? Companies should not only pay attention to country data, but also collect and assess specific data on their suppliers. The combination of this data enables a sound assessment of risks.
In addition to traditional corporate and financial data, ESG (environmental, social, and governance) data is also playing an increasingly important role in the risk assessment of business partners. This data helps to assess compliance with environmental standards, human rights, and occupational safety. The keyword here is the due diligence obligations and protected legal areas from the Supply Chain Due Diligence Act (LkSG). Taking ESG aspects into account can help meet compliance requirements. And to protect your company’s reputation, consider possible negative media coverage of incidents involving business partners in your value chain. For example, we evaluate 10 country-based generic risk indices for our clients and enrich them with company-specific risks.
Minimising risks
Identifying risks is a first step. To make the supply chain more resilient, the identified potential risks need to be assessed. This can be helped by categorising business partners as red (high risk), yellow (medium risk), and green (low risk). Such an assessment provides clarity on where measures need to be prioritised in order to prevent risks. Alternative suppliers should also be identified in good time who can step in if the primary supplier fails or drops out for other reasons (breach of protected legal positions under the Supply Chain Act, LkSG), for example. Not every potential risk is a risk at the end of the day, and not every potentially identified breach is a real breach. Proper risk management goes a long way towards helping companies assess and translate the findings derived from the data into action.
Challenges in risk analysis and risk management
One of the biggest challenges in supply chain risk analysis and management is assessing not only the direct suppliers but also the suppliers known to the supplier.
Success factors for a resilient supply chain
Data plays a central role in analysing and creating resilient supply chains. Companies should strengthen their supplier relationships and get to know their direct suppliers well in order to better understand their relationships with indirect suppliers as well. Close cooperation and communication with business partners are crucial to identifying and managing emerging risks at an early stage. After all, it is not always about replacing a supplier at will but tackling identified risks and violations together to bring about an improvement for all parties and stakeholders. I see the termination of a business relationship as an ultima ratio, which should not be the goal. I see the termination of a cooperation as a failure in the implementation of due diligence and believe it should only be chosen if intensive work on solutions has been done beforehand.
My take on it
Designing resilient value chains has become not only a means to an end for global companies but also a differentiator. By using data analytics and risk-based approaches, companies can identify and minimise risks in their supply chains. Consideration of ESG data and knowledge of supplier relationships at different levels are critical to doing due diligence and making the supply chain more resilient. Building trusting relationships with business partners is another success factor on the way to a resilient supply chain that can cope with current and future challenges.