Critical items may not be known

The latest events and disruptions again highlight the need for your business to know the origin of materials and therefore risks when buying items through global supply chains.

Governments have become more aware of minerals and agricultural items that are critical at the national level of their country and some are taking action to secure supplies. However, it is expected that individual enterprises will take action to protect supplies of specific inputs that can affect their ongoing business.

Your organisation may assume that it has diversified its supply risk by acquiring inputs from a number of Tier 1 suppliers, but less known is from where the Tier 1 suppliers obtain their inputs and so on through the Tiers of suppliers. It could be that all goods within the product type are reliant on one or a few suppliers at Tier 3 or 4. Think speciality alloys for instruments and fittings, special purpose adhesives and coatings and substrates used in packaging. These suppliers can stop supply to Tier 2 suppliers, without your organisation being aware of the cause. Examples of critical suppliers are:

• Companies in Ukraine and Russia participate in the semiconductor supply chain through the supply of specialist ingredients. Examples are C4F6 gas and Neon gas; both used in lithography for semiconductors. Russia produces 90 percent of Neon’s global supply, with 65 percent then purified for the global market by a specialist Ukrainian company based in Odessa. The current global shortage in semiconductors could be extended for some time.
• In late 2021, a shortage of Urea used in fertilisers caused an emergency in the supply of AdBlue or Diesel Exhaust Fluid (DEF). This is a mix of urea and water to reduce the amount of pollutants emitted by diesel-powered vehicles. Few people knew of AdBlue, yet its absence threatened to stop the movement of commercial trucks.
• Paracetamol (for pain reduction) has a number of Active Pharmaceutical Ingredients (API) producing companies, but all producers are dependent on para-aminophenol, an intermediate input produced in China.

Understanding your supply chains network

Risks to business continuity from the inability to supply can lay deep inside supply chains, so understanding where the risks are may require a lot of investigation. Long supply chains and multiple Tiers of suppliers requires that a business builds an intelligence base of its Supply Chains Network.

The first step is a project to ‘reverse engineer’ your organisation’s products, to identify all component parts or ingredients that are supplied, back to Tier 3 or 4 in a supply chain. This is because intermediate products are likely to be purchased against a ‘performance specification’. Tier 1 suppliers guarantee their product will meet the performance requirements, but are reluctant to divulge the suppliers of input materials. The same situation occurs at the next Tier and so on.

The ‘reverse engineer’ project enables an extended Bill of Materials to be constructed for each product group. Against each material is a rating score that identifies how Vulnerable the business is to the material item and how Critical is the item to the business.

Supply Vulnerability factors:

• Geopolitical risk for the country from which the item is supplied
  • Trade barriers that have the potential to be erected against the supplying country
  • Political and economic stability of the supplying country
  • Reliance on extended supply chains, including distribution routes
• Trade regulations
  • Business regulations – extent and expectation of adherence
  • Trade regulation effects e.g. duties, dumping and political embargoes
  • Technical regulation effects e.g. permits for supplier; IT interoperability with a supplier
• Sustainability and Society
  • Environment, Social and Governance (ESG) adherence
    • climate vulnerable in country or facility location
    • country compliance with environmental standards e.g. sensitivity to damage of the supply country’s biodiversity
    • country climate change adaptation actions undertaken and planned
    • the material relies on natural resource inputs, such as water, that are vulnerable to climate change;
  • Compliance with social standards e.g. human rights abuse; exposure to reputational risk
  • Supply chain cybersecurity risk
• Disruptions from natural events
• Concentration of suppliers, including at tier 2 and 3
  • Strategic Dependency: “if a country imports a particular good (or item) and more than 50 percent of its supplies come from any one country and that country controls more than 30 percent of the global market for that particular good (or item)” Source Henry Jackson Society
  • Reliant on a few suppliers located in the same geographic area
  • Supply certainty for the input raw material
    • tier 2+ suppliers are unlikely to reveal the extent of any problems to their customer’s customer (your business)

Supply Criticality factors:

• Substitution of material(s) or new production technologies – how likely
• Long term supply availability of materials
• Economic importance of the item
• Importance of the item in the development of future products and technologies
• Are alternate sources of supply readily available or can supply be increased quickly, either from international or domestic sources?
• Can the input item be substituted relatively easily, with limited need to redesign?
• Are price fluctuation extremes likely?

Points to note about Criticality: Although there maybe a dependency for an item on a supplier country, the risks associated with that dependency may not be high, therefore the item is not critical. Do not use annual spend with a supplier as a measure – spend does not equate to risks

The material items with a high risk rating score are investigated for their potential sources and whether they provide any additional risks. From this information, your business can structure its Supply Risk Mitigation policy, which identifies the range of options available, such as:

• Reduce the number of SKUs
• Supply Chains design to focus within regions
• Nearshore or Onshore production
• Increase the number of backup production locations
• Increase inventory along each supply chain – Hold ‘just in case’ inventory (even in a different ‘form and function’) at specific locations. Increase inventory of critical items
• Dual source materials – investigate alternative sources for the item
• Supplier base: Nearshore or Onshore and increase suppliers of intermediate products
• Alternative materials that achieve end user satisfaction objective
• Change the product mix and influence customers or consumers to change their buying behaviour

The policy becomes an input to your organisation’s Supply Markets Intelligence portfolio, an essential companion of the Supply Chains Network Design map. The map includes details of each Node in the network (including inbound warehouses and distribution facilities) and transport Links, including hubs and ports.

These steps look deep into your supply chains and appear to be time consuming and therefore expensive to complete. But what is the cost of a surprise disruption that halts your business? Given the current and potential scenarios for instability in global supply chains, your conclusion should be that understanding the risks from materials used in supply chains is essential.