From the onset of the pandemic, the global supply chain has taken one hit after another. COVID-related closures. Logistical difficulties stemming from those closures. Crucial trade channels being blocked. With one thing after another, it’s been a string of headaches. The dependencies baked into this globalized system designed to operate at max efficiency are showing now that it’s not working at max efficiency.
This leaves businesses around the world, and their logistics and procurement teams, scrambling day and night, with a new situation constantly arising that needs creative workarounds to keep goods flowing and customer demands met. There are a number of particular global trends and realities that are putting pressure on procurement teams to account for new risks in order to meet privacy, infosec, contract, and compliance requirements.
For one, the likelihood of a recession coming our way is likely to dampen sales forecasts in most categories. And the record levels of inflation that the world is experiencing right now are only serving to speed along those squeezed margins and increase all sorts of tangential risks. What if consumer demand shifts away from one product or category when their dollar doesn’t go as far? What if a key supplier is forced to shut down during the downturn?
Supply chain teams would do well to take steps today to prepare and make sure they can maintain ample supply to meet customer demands, as well as build in the flexibility to change course, relatively quickly, if needed.
Complicating those plans is the new normal of the world: volatility.
Where you could formerly rely on some countries as being stable and reliable, wrenches have been thrown in the gears everywhere you look: wars, social upheavals, counties joining or leaving trading blocs and agreements— nothing is a given anymore, and that lack of certainty carries a lot of risk for supply chains. Delays, disruptions, or other complications, have always needed to be weighed against the benefits of doing business abroad, but those risks are now higher than ever and carry even more weight.
One area where procurement teams are discovering they have a distinct lack of visibility is their susceptibility to sanctions. As we’ve seen as a result of the war in Ukraine, the sanctions landscape can evolve, and quickly. A company might need to find a replacement for one supplier fast or risk massive fines. But, finding out which suppliers need to be replaced is not always as easy as checking the list of sanctioned companies for a supplier name match. Many businesses overseas have complicated or obfuscated ownership structures, which means a more thorough check for UBOs—ultimate beneficial owners—is necessary to not run afoul of sanctions. Even if a supplier is not directly sanctioned, the company could still face penalties if one of the company’s UBOs is on the list.
Speaking of penalties, the risk of fines for not adequately taking steps toward sustainability—and properly documenting them—is only increasing.
- The EU recently passed the CSRD, the Corporate Sustainability Reporting Directive, which specifies what ESG and sustainability disclosures will be required by law for anyone doing business in the region. Those will come into effect in 2023 and the U.S. may not be far behind—the SEC proposed similar rules back in May.
- Both the SEC proposals and the EU laws specify that Scope 3 emissions must be disclosed as well as Scope 1 and 2 emissions (which come from the company more directly).
With 70% of many companies’ emissions resulting from their supply chain (i.e. Scope 3 emissions), it will be no small feat to gather and report that info. Significant technological upgrades will need to be made along the supply chain to document emissions data, but the cost of not complying will only grow higher as more regulations are put in place—both domestically and worldwide.
As so much volatility comes from every direction, supply chain managers need to weigh the risk of their suppliers based on geopolitical and economic factors.
Assessing the risk level and kind of risk for suppliers—starting with the ones most critical to day to day operations first—will tell companies a lot of what they need to know in order to build more resiliency into their supply chain. For example, we have seen an increase in “friend-shoring” (moving production to friendlier, more stable countries) and “reshoring” (moving outsourced production back home) as a means of mitigating riskier suppliers across the globe. As long as the risk isn’t exceptionally high, or a major disruption or shutdown is imminent, it tends to be best to divest about 5% per quarter from risky suppliers until the situation improves or a complete contract closure won’t disrupt operations downstream.
Of course, changing suppliers, even slowly, can be expensive. This is even before accounting for the fact that production in less risky countries generally costs more than where companies have traditionally outsourced. It’s not possible for each company to make such significant changes, which is why putting tools in place to increase visibility is so important. This will help make ESG and sanctions checks and ensure that new suppliers that come on are ones with acceptably low levels of risk.
Automation capabilities in third-party management software (TPMS) are a big part of how procurement teams have started getting better visibility into their growing supplier bases; they allow for strategic sourcing decisions to be made, constant monitoring of changing situations and relationships, and provide a significant time savings for procurement professionals—crucial for the belt-tightening process that generally accompanies recessions at most companies.
Procurement teams looking to reduce the risk accompanying our world’s current difficult realities should prioritize these automation features in their solutions. These features allow for all stakeholders to be involved without it slowing down the process, and for flexible workflows that adapt to rapidly evolving situations. By integrating these solutions with already existing business systems and data sources, procurement can automatically be alerted to any changes at suppliers that might increase risk and perhaps necessitate a change in relationship.
Better information, on suppliers and the regulations around them, is the key to navigating a volatile global world that doesn’t appear to be settling back into “business as usual” anytime soon. Companies will preemptively act to arrange their supplier relationships in strategically beneficial ways with increased flexibility and lower risk. A close look at the risk profile of current suppliers, and making plans for mitigating the risks found, will go a long way toward getting through the bumpy road ahead while meeting commitments to customers, partners and stakeholders.