The three sources of risk faced by every company

Companies need to take a comprehensive approach to mapping supply chain vulnerabilities to address risk properly, according to a report.

The report, from consultancy McKinsey, said procurement departments needed a “comprehensive view of their supply chain vulnerabilities, organised around their companies’ product lines”.

McKinsey identified three sources of risk every company will face “in one way or another”:

1. Shortages

One of the most prevalent issues is the unavailability of products vital to continuing operations. McKinsey specifically refers to processed products rather than commodities, as these have much longer supply chains with a higher potential for shortages of one essential component along the value chain.

Assessing market reports, analysis via resource experts, and supply/demand investigation will allow companies to build a “catalogue of category shortages”, that can be used to inform decision-making. Once a company has visibility down their chain on whether the greatest risk factors for the product is, they can take mitigating actions such as preparing to switch to alternate suppliers, or entering into longer-term, higher-value contracts.

2. Supplier defaults

Supplier failures are inevitable over a 5-10 year period. Managing essential suppliers at risk of going out of business requires a far more comprehensive view of the supply chain. The only way to be certain of a tier one supplier’s safety from risk is to understand your tier two to four suppliers.

McKinsey recommends investigating your tier one suppliers to understand their own supplier networks, risk management processes, financial challenges, regulatory requirements, data security and reputational vulnerabilities. Businesses should aim to work with “organisationally mature” suppliers, who have ensured their internal functions can help them recover from inevitable problems and implement future contingencies.

Understanding all these factors will allow procurement leaders to plot supplier risk against importance, and take action to implement mitigation plans for high risk/high importance suppliers.

3. Out-of-control inflation

Supply insufficiency leading to price volatility has become more prevalent in recent months. Metal, gas and oil, and agricultural commodities are increasingly limited, in part due to the war in Ukraine. Strained labour markets have also led to services inflation and created a combined environment of extreme price rises.

Companies can combat these soaring prices with a three-step approach:

a) Use comparative values or bills of materials to determine how prices might develop over time, according to whether a product is more exposed to raw materials or services.

b) Model these price changes with market forecasts and expert assessments.

c) Rank inflation for top supply categories and understand where increased spend will come from.

Following these steps will allow for renegotiation and repricing to ensure future projects can continue.

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