Map and diversify: two responses to a crisis
Written by: Alex Saric
Written by: Alex Saric
About Alex Saric
Alex Saric is the Chief Marketing Officer of Ivalua, a unified, enterprise AI platform for managing spend and suppliers.
The closure of the Strait of Hormuz is making people look at supplier risk management in a new way. What has been most surprising?
How vulnerable all organisations are. There are so many different factors that are impacting supplier risk. There are direct ones where supply chains involve physically transporting goods through the Strait. That traffic is disrupted, or they have to add 15 days to go around the Cape of Good Hope, so the cost of shipping has gone up.
Then there’s the number of materials that come from the Middle East. People might not think they are going to be impacted and that there is no risk, as their products are not going directly through the region, but they will be if they rely directly or indirectly on fertiliser, for instance, as the availability of urea and sulphur are both affected.
Plus, energy prices are impacting everyone. Even if you're a domestic business that sells and buys locally, your energy costs will be going up, as will the costs of other commodities. The lesson from this is that there’s nowhere to hide and that everyone is exposed to supplier risk, often in ways they haven’t realised.
Has the scope of that risk blindsided organisations?
Yes. One of the main ways that organisations are responding to supply chain risk is that they’ve started building inventories. I don't think it was because of just this shock, but because they've realised how vulnerable they are to supply chain disruptions.
If you look at fuel costs, at least in North America, I think I know of only one carrier who hedged them. The other carriers apparently have not done the same so are highly vulnerable, and you see what's happening to margins in airfares.
I would guess that it was a financial decision, such as whether you buy insurance or not. Most of the time you're losing money, but then something bad happens and you get burned. For instance, Spirit Airlines had already been struggling and the extra shock to oil prices pushed them to bankruptcy. If you want an example of how organisations were blindsided by risks within their supply chain and didn't prepare, this is a great one.
How would you respond to the risk now that it has materialised?
Firstly, I’d start modelling my exposure to that risk and understanding how much it is going to hit me. Secondly, I’d start mapping out alternate suppliers, looking for new sources of suppliers and engaging existing suppliers to understand what options they have to minimise cost or avoid delays or disruptions. And thirdly, I’d start planning for the next crisis.
What should the end goal of the mapping process be?
We have clients who have mapped even the fourth tier of their supply chain almost completely, which gives them a lot of insight into what supplier risk looks like and into the sources of it. And what’s really interesting about the process of doing that is some of the interdependencies it reveals.
Customers will think they have two very diverse suppliers, which is seemingly ideal for supplier risk mitigation, but it turns out they are both dependent on the exact same third tier supplier, and that supplier is in the same region of the same country. This means they have less risk diversification than they first thought. Most organisations are working towards more thorough mapping, even if it's a minority who have achieved it.
Could this mapping help you build an ecosystem that was completely shockproof when it came to supplier risk?
I suppose you could probably build something close to that, but at such a high cost that it wouldn’t be economical, and you'd put yourself at a disadvantage until a crisis struck. The goal is just to be more resilient to the types of risks that we can expect.
Does that mean diversifying your suppliers or investing in stronger relationships?
I don't think it's an either-or. I think you have to do both, otherwise you're gambling on what the nature of the next shock will be. It comes down to not putting all your eggs in one basket. If you have great relationships with some suppliers, but there are only two of them and they’re severely impacted, the relationship isn't going to matter that much.
You could get away with this when optimising primarily for cost, and everything was flowing efficiently around the world. The change now is that there needs to be more diversification of supplier risk, and more proactive supplier risk management.
Rather than having alternates that are optimised based on cost, look at the total value, look at where your supply routes are, whether they overlap, or whether they're distinct. Diverse risk exposures among your suppliers add up to a fairly good level of resilience.
Maybe there is a near-shore supplier and a low-cost supplier you could choose. This would let you shift volume from one supplier to the other much more easily than you could find a completely new supplier you haven't worked with before, with all of the additional risks that come with that.
What or where do you think the next supplier-related crisis will be?
If I could answer that, I’d start a hedge fund and solve a lot of the world's problems with all the money to be made. But if I really had to guess, I suspect there will be another geopolitical shock. We’re moving away from a unipolar world, and history has shown that unipolar or bipolar worlds are relatively stable. But you never know.