Monitoring Supply Chain Risk on a Limited Budget

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In the past, monitoring supply-chain risk consisted of simple supplier credit checks. In today’s global business environment, monitoring risk must now include estimating the potential impacts of disasters, geopolitical unrest, and regional economic risks. It’s no wonder that most people believe that it takes outside help, and a big budget, to develop an effective supply-chain risk monitoring (SCRM) program. While there are services that will map and monitor companies’ supply chains for a price, the reality is that no one understands the nuances of a company’s supply chains better than the company. With today’s readily available resources and applications, an SCRM program is within every company’s reach, even if they have no budget for it. The key to monitoring and assessing supply-chain risk correctly is knowing how to start.

A supply-chain mapping and monitoring program is not a large, complicated program, but rather a series a straightforward steps that work together. All it requires is corporate enterprise resource planning (ERP) data, a spreadsheet application (e.g., Microsoft Excel), a mapping program (e.g.,Google Maps), and an event-alert system (e.g., Google Alerts). For companies that do not have an ERP system, all that is needed is an Excel spreadsheet, and the ability to develop “pivot tables,” designed to allow columns and rows of data to be summarized and reorganized easily, and allow data to be viewed from different perspectives (1). The following are three possible levels of mapping, depending on corporate priorities for determining risk:

• Level 1, location risk, requires a spreadsheet loaded with the suppliers’ names and locations (i.e., city, state and country). Uploading this spreadsheet into Google maps or another mapping program shows supplier impacts due to natural disasters, geopolitical or other risks.

• Level 2, purchasing exposure, requires a spreadsheet with supplier name, supplier part number, internal part number, price, and annual spend. If a supplier is currently in a Level 1 location risk situation, performing this exercise will help customers understand which materials may require purchasing on an emergency basis.

• Level 3, revenue exposure, requires the bill of materials (BOM) mapped to the supplier part number. This analysis allows informed purchasing decisions to be made based on potential revenue impacts.

Assembling the right data

Ironically, the most difficult part of mapping any supply chain is getting clean data in a useable form. The following information, ranked in order of importance, is required:

• Suppliers’ names, addresses, and phone numbers and business contacts, which will be needed in order to physically map the supply chain

• Raw materials linked to suppliers, which will be needed in order to analyze risks to each supplier

• Raw materials linked to finished goods, which is required to calculate the buyer’s exposure

Mapping the data

Once suppliers’ names and addresses are in a spreadsheet, create a visual global map by uploading the addresses to a mapping program.  If you have a gmail address, you can use Google maps for free. Keep in mind, though, that Google maps will only allow 150 entries to be uploaded at a time. For longer lists with more suppliers, sort the list by state or province, country, or region, and create several Google maps, one for each different region.

Because of language differences between countries, street addresses can be difficult for the programs to interpret. Rather than spending time tweaking the street address, it can be easier and just as efficient to upload only the city and state or province where each supplier is based. If and when a risk pops up in that city, contact the supplier directly, and immediately. These time-saving steps eliminate the need to massage the data on the front end, or, rowse, abandoning the effort altogether.

To refresh your data, simply require your supplier to update location data during price increases. In some cases, suppliers consider this information confidential.  However, a non-disclosure agreement or supplier-coded information, such as the supplier’s vendor number as the name of the site, is all that is needed.

Once supplier locations have been mapped, it is time to monitor for risk. This should be done both informally, by watching or listening to news reports daily, and by setting up electronic alerts.  Alerts will not do any good, however, if there are too many of them. To prevent an email inbox deluge, limit alerts to the most strategically important.

In the author’s experience monitoring the chemical supply chain, 95% of actionable alerts come from these extremely broad entries:

• Chemical plant fire

• Chemical plant flood

• Chemical plant explosion

• Chemical force majeure.

Natural disasters and broader events tend to make the TV or radio news before an electronic alert. International weather events, however, may not make it to local news stations. The following are some suggestions to try, and refine:

• Typhoon (country name)

• Floods (country name)

• Winter storm (country name)

• Drought (country name).

At this point, the supply chain has been mapped and risk has been monitored. When an event does occur, the following steps can help blaze a path to risk mitigation.

Color-coded pins for priority areas

In the case of a natural disaster such as an earthquake or typhoon, and even with geopolitical unrest, go to your Level 1 location risk supplier maps, created previously, and locate the city and state affected. Google Maps allows users to type in the name of the city where the event occurred, and shows that point on the map with its own specific color “pin.” Note those suppliers that could be affected by the problem, and contact each of them directly, as soon as possible.

While waiting for a response from the suppliers, analyze Level 2 purchasing and Level 3 revenue exposure risks that were created from ERP data at the beginning of this process, and be ready to act.

Typically, a supplier can determine within hours whether there is an impact to its supply chain.  If it takes longer than 24-48 hours for the supplier to respond, assume they are mitigating their own risks before responding. While this may not always be the case, it is best to assume the worst and hope for the best.

Events like fires, explosions, and forces majeures tend to impact a specific supplier, rather than all suppliers within a given geographic area.  In situations like this, analyze Level 2 purchasing and Level 3 exposure risks and contact all potentially affected suppliers directly.

Advanced monitoring and mitigation

When it comes to risk, being able to react quickly is key to reducing exposure, but being proactive is the key to avoiding loss. Crystal balls are hard to come by, but one can expand one’s monitoring upstream and downstream so that risk can be anticipated by monitoring how the product is made, who makes it, and who uses it. The following is an example of how to perform advanced monitoring for the commodity chemical, hydrochloric acid.

First, examine how the product is made. Hydrochloric acid is produced in two ways: by reacting hydrogen and chlorine, and as a byproduct of polyurethane (PU) manufacturing.

• Step I: Research the upstream materials used to make the product and begin monitoring those materials.

• Step 2: Understand the byproduct inverse relationship. Materials that are manufactured as a byproduct have an inverse relationship with the primary product. For example, if the price/production of PU goes down, the byproduct hydrochloric acid availability goes down because PU is not being produced. Therefore, the laws of supply and demand are likely to push prices up.

• Step 3: Choose upstream materials that can be monitored for price fluctuations. In the case of hydrochloric acid, for instance, chlorine prices can be followed easily. If prices for chlorine go up, prices for hydrochloric acid will be vulnerable to increases.

Know who makes it. Just as each company should monitor its suppliers for events, they should also follow other key producers of the same material. If one supplier goes down, that company’s customers are going to need material and will often source it from their supplier’s competitors, the market will tighten, and the product’s price will increase.

Know who uses it. The biopharmaceutical market is a small player in the larger industrial chemicals market. Oil and gas uses hydrochloric acid solution in drilling and fracking activities, while car makers use PU in car seats.  If oil and gas activities go up, demand for hydrochloric acid goes up.  When auto sales go down, demand for autoseats, and production of PU and hydrochloric acid go down.

In 2011, oil and gas activities were booming because of an increase in fracking, but new auto sales were tanking. The result was a shortage of hydrochloric acid that sent the oil industry scrambling for material.

There can be quite a few markets to monitor. The key ones that determine raw material availability, will be:

• Agriculture, monitoring the price of corn and supplies of chemical fertilizer

• Automotive, focused on new auto sales

• Construction, centered on new housing starts

• Oil and gas, monitoring oil rig counts and fuel costs.

Monitoring for risk in the supply chain is no longer the simple financial check that it once was. To stay competitive in today’s just-in-time manufacturing environment, companies throughout the supply chain must consider the potential impacts on availability and cost from disasters, geopolitical unrest, and regional economic risks.

While monitoring can always be outsourced, each company is, in the end, the leading expert on its own supply chains. Today, given the number of resources and applications that are available at no cost, a zero-budget SCRM program is within every company’s reach.

Reference

1. Microsoft, Create a Pivot Table to Analyze Worksheet Data, a tutorial, microsoft.com.