The need for resilient and transparent supplier relationships

This is the second in a series of articles exploring supply chains and their strategic importance as part of the post-COVID response. Our first post considered the shift toward more customer-driven supply chain models, which you can read here. 

Modern supply chains have become complex, multi-tiered and increasingly reliant networks. Their dispersed nature makes the need for transparency critical but challenging, particularly in the face of dynamic customer demand and rapid product lifecycles. Yet, while most companies have mature functions that monitor internal performance, many don’t have methods in place to understand their immediate and extended supplier networks.

In the ongoing COVID-19 response, companies have renewed their focus on scenario planning, trying to understand where the next shock might come from and which supply levers can be pulled. However, less attention has been given to understanding how external networks make the supply chain vulnerable. Deloitte's 2020 CPO Survey found that only half of procurement functions have High visibility over Tier 1 suppliers, while 90% rated their extended supply network visibility as Moderate to Very Low.

Broken nodes in the second or third tier can have cascading effects. Deloitte research suggests that for some organisations, third-party risk incidents have at least doubled in the past five years — the recent Suez Canal blockage showed that seemingly isolated problems can bring global supply chains to a halt.

As they emerge into a new normal, organisations will be seeking to gain greater transparency about their suppliers. This goes beyond simply gaining visibility; visibility should then become the catalyst to learn from and address gaps in the supplier network, in order to manage risk and build operational resilience.

Building on existing supplier management practices

Supplier management is a well-established practice. All organisations seek to extract the most out of their commercial relationships and when done well, effective sourcing, negotiation and contract management are all core tools in the procurement kit.

However, added complexity means that supplier management is evolving into a more foundational and strategically critical discipline that mitigates risk, ensures continuity and maximises value. Efforts to deepen supplier relationships and increasing collaboration have both been themes in recent Deloitte CPO surveys, recognising the need to build flexibility into operations. This doesn’t mean organisations must start over or undertake wholesale change - a series of practical steps can help to build assurance through a ‘continuous improvement’ mindset:

De-risk the procurement process

• Understand how the voice of transparency and resiliency can be strengthened in procurement events. Consider whether evaluation criteria should explicitly cover respondents’ risk exposure, as well as the broader reputational, environmental and societal drivers at play. Make these topics a priority when conducting due diligence and (where possible) quantify the key risks that might impact not only contract performance, but the wider organisation.
• During negotiations, consider how terms can be tailored to encourage supplier behaviour that holds mutually beneficial outcomes as important in the long-run. Review whether the incentives underpinning the arrangement strike the right balance between fulfilling to input/output measures versus delivering to more holistic, outcome-focused measures.

Understand and prioritise the existing supplier base

• Revisit supplier segments to ensure they align with traditional measures of contract spend, volume and complexity, as well as a more complete view of business criticality and risk exposure. Identify who in the organisation will take ownership of which supplier relationships, at what frequency, and align incentives to set behaviour expectations. Establish clear, two-way lines of communication with key segments, identifying if any capability or capacity investments might be required to resource ongoing delivery and oversight.
• Identify where supply redundancy must be built into operations, based on potential demand fluctuation and supplier risk. Minimise reliance on single sources for critical inputs and diversify the supplier base to get ahead of potential bottlenecks.    

Measure, report and action as part of BAU

• Understand what can and can’t be achieved through data and insight. Many companies struggle to access data about their external suppliers and are often then unable to use this data to seamlessly connect the dots across network silos. Consider where foundational gaps might exist in process, systems and core data, and establish a case for investment.
• Identify meaningful leading and lagging indicators. Select measures that are relevant to your suppliers and your own business based on mutually-defined objectives, and be specific on how those goals should be measured. Make these measures the focal point for discussion and use them to drive proactive two-way performance management. Establish a robust risk and benefits management approach that includes the policies, processes and responsibilities to action opportunities, address risks and improve outcomes from the supplier portfolio.

While the points above may sound like added cost that stretches already scarce resources, these levers should be seen as building blocks that complement existing supply chain management.

It will help to take an economic view of the challenge to increase maturity and network performance in the long run. Should there be another shock in the future, a view of the counterfactual is also important – by not taking a proactive approach to transparency, the risk exposure increases for all parties across the supply chain network.

Organisations are reassessing their supply chain risks, and redefining supplier relationships as a result. Whereas in the past, cost has been the primary factor for choosing and managing suppliers, a shift towards a more risk-based equilibrium will build resilience into operations.