6 steps to manage supply chain risks
Since the start of the COVID-19 pandemic, many shocks have affected supply chains.
Some products have seen a sudden rise in demand, while it has dropped rapidly for others. Normal shipping routes and patterns were also disrupted by the shutdowns and reopenings.
In this context, businesses that did not properly manage their supply chains ran out of materials and parts, or ended up with finished products that couldn’t find a buyer.
“Companies need to figure out what is the demand change in the market for their products and how they’re going to manage their cash flow,” says Ali Lajevardi, Senior Business Advisor with BDC Advisory Services.
“If you build up your inventory for the current market, what is going to happen when the economic environment changes? We need to act short term, but there is going to be a long-term impact from the decisions that we make today.”
There needs to be an alignment between the sales forecast and the operations to make sure the demand is known by the operations team. As the situation is continually changing, you need to be flexible in creating and implementing your plan.
Ali Lajevardi, who has extensive experience helping entrepreneurs manage their supply chains, offers the following advice for minimizing risk.
1. Gather your leadership team
The first thing an entrepreneur can do is gather a team of leaders from sales, purchasing, production, logistics and financing to align and prioritize operations and ensure that they can continue during the crisis or restart once the crisis is over.
This team should meet daily to review sales and operations plans and be ready to adjust if any issues arise. Put your people and employees at the center of this.
Companies need to have daily operations meetings to review risks and make sure you are on top of mission-critical activities.
“Companies need to have daily operations meetings to review risks and make sure you are on top of mission-critical activities,” Lajevardi says. “For the management team, it’s a balancing act in a rapid decision-making cycle.”
2. Determine the level of demand for every product
Next, key customers need to be contacted to determine their needs in the coming weeks.
This will create a forecast of expected sales, which will allow you to adjust your inventory purchases and forecast your cash flow.
Lajevardi says another result of this exercise should be a simplification of your product range. “Instead of making 10 different versions of 10 things, with limited inventory, pick five products and focus on those for the short term.”
You will also want to review your production plan to prioritize certain items that are in demand, while reducing others that aren’t needed.
3. Classify your inventory on hand
The next order of business should be to look at your current inventory levels for various types of goods:
- finished products
- work in progress (WIP)
- raw material and inventory that’s ready to be transformed
Many companies don’t have visibility on their current inventory level. Yet it’s critical to know what you have on hand and to classify it according to its importance. It will help you define priorities, establish what is available for production and sales, and also help assess out-of-stock risks.
A simple way to classify items in your inventory is to complete an ABC analysis. The principle is that 20% of your stock accounts for 80% of the value of the business. The intent in a context of shortage of resources is to focus your efforts on products that will have a significant impact on your operations.
- Category A – Items you can’t afford to be out of stock, ever: your bread and butter
- Category B – Items with low sales or use but that you must still keep in stock
- Category C – Low-volume items with high carrying costs that will not make a large contribution to your bottom line
Some companies might be tempted to hold onto more stock than usual because of current volatility, but overstocking risks tying up your cash into inventory that can’t be moved.
One solution could be to hold on to fewer finished products, since raw material might be easier to dispose of.
4. Analyze inbound and outbound supply chain risks
With a clear idea of what you want to produce or distribute, your next step is to identify the risks across your supply chain.
One simple way to do this is to break down your supply chain into inbound (how resources get to you) and outbound (how products get to your customers) risks.
|Inbound risk analysis||Outbound risk analysis|
Key sourcing suppliers
Sourcing contract renegotiations
Transport and inbound shipping
Transport and outbound shipping
You can use the risk assessment grid below to further analyze and prioritize the risks. Based on this exercise, you may need to review your inventory policy and parameters, such as safety stock and minimum orders.
5. Develop contingency plans
Having identified your risks, you should look for ways to mitigate them. Prioritize issues with a higher risk score.
For example, many businesses are now shipping in smaller quantities to allow for more flexibility. Companies are also shopping around for new carriers and different rates. Others are turning to new modes of transport;transport, examining new options and comparing them to known modes.
Businesses should also be looking for alternative suppliers. Local suppliers, for instance, might be more attractive since goods won’t have to cross borders.
Also keep in touch with your main suppliers on a regular basis. Try to get visibility on their stock status and be kept up to date on issues that arise. They are also aware of what they send and to whom. Other clients might have supplies that they are not using and would be willing to sell to you.
6. Communicate and think long-term
During this period of uncertainty, it’s important that you remain strategic about the choices you make.
“Even if we don’t know how long this economic context will last, we can be sure it will create new operational and supply chain norms, with technology, more than ever, being at the center of these changes,” Lajevardi says.
He also stresses the importance of keeping daily communication channels open with your clients, partners and suppliers.
“Open communication, internally and externally, not only helps your organization address its short-term needs, but it also helps position yourself for the new market context once the storm has passed.”
Improve your inventory management
Discover how to set key performance targets, ensure you always have the right amount of inventory on hand, and improve your company’s cash flow by downloading our free guide for entrepreneurs: Inventory Management.