Uncertainty in Supply Chains

What new risks in your organisation’s supply chains have been identified? In the past week articles have discussed the potential (new?) risks to global supply chains from the outage of communication cables under the Red Sea. Also that the current lack of rainfall in Panama could be a risk to the long-term viability of the Panama Canal.

These examples show how your organisation’s supply chains can become more uncertain, even though the events that may not immediately or directly affect your business. Uncertainty about supply chains is a situation of not being confident about what is (or might be) occurring. And that is common for organisations which rely on global supply chains and even for companies that buy from a local wholesaler or importer, but which rely on the supply chains of their suppliers.

Within a supply chain, Uncertainty is the product of Complexity within and between organisations, Variability in throughput and lead times of businesses and Constraints in processes. Although known to exist they are unpredictable, because enterprises do not have control over flows through their extended Supply Chains Network (of items, money, data and information). Uncertainty about supply chains will increase as an organisation is willing to accept:

• Long distances from the organisation to its suppliers and customers
• Low safety margins concerning lead times, inventory and working capital
• Focus within Operations on speed and efficiency rather than effectiveness. If too much responsiveness is required, the result can be Instability, through the supply chains
• Increased complexity of Flows (items, money, data and information) through the supply chains. Flows are also Non-linear in operation, with many ‘ifs’ and ‘thens’, as in a Decision Tree diagram
• Lack of knowledge about where among the Nodes and Links of the Supply Chains Network is Power exercised (through ownership, control or influence). Also the risks associated with Dependency between businesses. Power and Dependency may affect the response to a disruption (such as the allocation of scarce materials)

Uncertainties become Risks

An Uncertainty is an unstructured opinion. To provide a structure for uncertainties is Risk Management. The central theme in the recent WEF Global Risk Report for 2024 is the increasing interconnectedness of global risks, with the necessity for a collaborative, multi-stakeholder approach to Risk Management. For supply chains, individual risks can be identified and addressed within a function; however, the danger is that multiple supply chain risks are not brought together, due to a lack of cross discipline knowledge.

To better understand the scope of risks for your organisation’s supply chains requires a team approach by people with a range of supply chain experience. The essential functions associated with supply chains (at least Procurement, Operations Planning and Logistics) work in a cross-functional team as the Supply Chains group. The types of multiple risks they will identify are:

• Connected Risk: where risks in a supply chain are considered to be unrelated, but are actually linked within the interconnected supply chains network. An event that disrupts one part of a network system can flow to other parts. which can then interact dependently, independently and inter-dependently to affect outcomes
• Interdependent risks: events (e.g. shortage of a raw material) in one industry or company may affect demand and supply factors in other industry sectors that supply to your business through Tiers 2, 3 or 4
• Contingent Risk: events within a supplier’s business that could affect a supply chain e.g.
  • fire at a material supplier or cargo theft from a 3PL
  • concentration of assets along supply chains, such as at Hub Ports and Logistics Hubs
  • licences to operate a commercial business that are issued (and can be withdrawn) by a national government
• Emerging Risk: developments that could change demand and supply factors in an industry sector which supplies items to your organisation’s supply chains
• Cascading Risk: potential of a disruption that can travel along and across supply chains. The disruption is unlikely to end at a defined Node or Link in a supply chain
• Cumulative Risk: when unrelated risks build over time to trigger a major event
• Consolidated Risk: when multiple supply chain risks that are known combine to create an unexpected new risk with its own characteristics. These are underlying risks that can be more long-term in terms of occurring, such as the impacts associated with climate change, geopolitical tensions, or technology disruptions

Your organisation’s Supply Chains Network is a Complex Adaptable System (CAS). A feature of CAS is that outcomes from interactions between businesses in a network (e.g. deliveries of items) cannot be planned in detail, but are Emergent. This is due to the actions and reactions by businesses in your supply chains to known or perceived risks, over which the management of your organisation has little control.

As discussed in the previous blogpost, supply chains are best understood and planned by the Supply Chains group, with effective processes that encourage Collaboration. And collaboration enables a better understanding of Uncertainty and therefore Risks in your supply chains.

Input of non-Supply Chain risks

However, there are additional risks that are external to the operations of supply chains, but which can influence their effectiveness. These risks are within the acronym PESTEL and knowledge of them comes from throughout the business:

• (Geo) Political: Geopolitics is the study of nation states and their external and internal dynamics. It uses geography to understand the constraints and imperatives in which a nation state and its parts exist. The following elements can be viewed as global or regional or as dimensions of a national behaviour
• Economic: Can be affected by international and domestic government economic policies and actions (geopolitics). At country level it involves: brand and business value; profitable revenue and cost of doing business.
• Social: Changing demographics among consumers. The origin of products and ingredients (‘clean and green’). Perceptions about the role of employment and labour conditions through supply chains
• Technological: Select and implement IT and telecommunication technologies; potential of disruptive technologies
• Environmental: climate change regulations; carbon emissions standards; the potential of moving towards a ‘circular economy’ for items; availability and price of utilities (water, electricity and gas); renewable energy expectations; use of eco-friendly packaging
• Legal: International and country-based laws and International trade agreements

To incorporate external risks into the Supply Chains Risk Management Plan requires elements of your organisation to be working together in collaboration with the Supply Chains group. The vehicle for Collaboration is the Sales & Operations Plan (S&OP), which can demonstrate to Tier 1 suppliers and customers in your Core supply chains how collaboration enables Risk Management to be an input to improve Supply Chains Planning.