Supply chain management risk in times of conflict

The ongoing Russia-Ukraine conflict has shed light on the critical importance of Supply Chains and the wider economy. From increases in food commodity costs to impacts on energy and fuel costs, the relatively stable global economy has suddenly had an injection of inflation and scarcity. And some business partners have unexpectedly become unavailable due to sanctions being applied.

This is on top of the challenging disruptions caused by Covid which have already influenced many companies’ attitude to risk and long-distance supply chains.

In addition, Brexit has had a significant impact, with various companies re-modelling their Supply Chain to minimise impact and maximise their potential opportunity.

Even the Ever-Given blockage of the Suez Canal highlighted the vulnerability and criticality of supply chains.

Is this a perfect storm or a massive opportunity? What does it mean to businesses?

It means they need to be able to easily understand what risk they are exposed to by continuously monitoring change. It means each business needs a detailed understanding of who its partners are, where its stock is, and its ability to mitigate price changes and product/resource availability.

To address these independent challenges requires joined up thinking and the ability to leverage systems and processes.

Know your Partners

The providence of your Supply Chain partners has become increasingly important in recent times. Knowing their underlying ownership structure and their vulnerabilities to disruption is important to understand to make sure that you can mitigate risks.

Microsoft’s “Supply Chain Insights” tools enable you to create resiliency and make better Supply Chain decisions with proactive risk mitigation via prescriptive insights, all powered by Artificial Intelligence (AI).

Being able to simply use your existing BI tools to –

Plot your partner locations, geographically highlights political and geographical impacts;

Integrate to Credit Management tools to enrich your data and therefore understand the ability of your partners to withstand economic shock.

Have regular conversations with suppliers (and customers where necessary) and capture their constraints, ownership structures and key partner characteristics in an easy to analyse tool.

The end result? You can answer these questions:

  1. Which partners are based in a conflict region?
  2. Which of their critical partners are in a conflict region?
  3. Which partners are owned by residents of sanctioned countries?

Know your stocks and supply chain bottlenecks

If the Ever Given happened to block the Suez Canal again, do you know the consequences for tomorrow? If a new conflict arose, would you know which partners are unlikely to be able to deliver next week? If a harvest failed in a critical ingredient how quickly could you find replacements?

How do you understand this?

You need a clear view of inventory, commitments and orders. You need to be able to understand it quickly and be able to make decisions quickly. This is where an inventory management “optimiser” or Supply Chain control tower comes in.

How do you manage it?

By managing your source of supply and dual or multi sourcing products so you can switch suppliers under times of stress quickly. Don’t forget to make sure that these alternative suppliers have exposures to different risks than the “prime” supplier…

Or – if you have some materials/ingredients that can’t be mitigated then the only way to be sure is to hold additional ingredient/material inventory. I’ve seen clients that have needed to hold 18 months of ingredient stocks just in case a sensitive harvest fails.

Understand your demand

Stock is the key to managing Supply Chain risk, it’s also one of the most significant costs to a business, consequently, balancing risk against working capital and forward commitments is one of the most challenging elements for any supply chain and financial manager.

To manage risk, it’s useful to quantify the “predictable” variations and then assess the additional safety factors that might be appropriate. To do this companies often use specialist demand planning tools to generate a forecast. However, it’s often not the forecast that is important but the variability of demand (easy to calculate – **see example below). You can do the same calculations for supply variations, the same for all levels of the BoM. To mitigate the current demand challenges, it may be best to ignore your finished goods forecasts and simply forecast consumption of key ingredients. It should be simpler as they are likely to be damped by your production processes and the divergence of your portfolio. They should therefore have a smaller fluctuation and allow you to report to your board of directors the investment required to provide confidence against typical Supply Chain fluctuations. Then decide on the additional factors to use to insure yourselves against unexpected risks, conflicts, ecological disruption...

The above doesn’t need a fancy Supply Chain forecasting tool (although it can help), the BI functions are available within Excel and the results are deployable from within your ERP system. Consequently, the tools you can use to understand and mitigate your risks are already at your fingertips.

Once you have quantified that risk and projected it forward, you can then assess how you mitigate it. Financially, you may wish to hedge or take a forward position on some of your more variable/significant commodities. For example, if wheat is a significant percentage of your procurement, then taking a forward position may have enabled you to reduce the impact of some of the 50% price rises expected in the next year. Achieving this may not need a new system or process but simply a clear view of your data, a good set of assumptions about your demand, and a method of recording your decisions and assumptions. Microsoft Dynamics 365 can provide all of these, particularly when aligned to the Power BI analytics and the data capture tools available within the Power Platform.

What else can you do?

Transport is a major cost but also a way to mitigate risk. It may not need to be a binary decision to sea or airfreight goods, but might be pertinent to use both methods. Ship your baseline demand via sea and then manage the variability via air? This maximises your ability to respond while reducing your overall stock cost (but increasing transport). Obviously a balanced view should be taken according to the profitability of your portfolio and the bulk/value density of your products. Again, managing this transport, highlighting shortages, and understanding the costs of shipment are key components of the Microsoft Dynamics 365 solution. Leveraging them together can provide you with some powerful information to make informed decisions and improve your cost/risk position.

As you can see, your systems are key to consolidating information, and leveraging tactical alerting can make sure that your company stays on the front foot through times of disruption. Leveraging the information that’s already available to you about your Supply Chain can help you identify challenges, highlight and mitigate risks, and work through unexpected and unpredictable challenges.

If you have questions or would like help to address these challenges, then please contact HSO.

**Demand Variability – example

If you have a consistent demand of five per week, every week, then you have zero demand variability and therefore don’t (theoretically) require any kind of safety stock to mitigate demand fluctuation (and yet with 4 weeks cover in place you’d be holding 20 in stock with no real purpose).

However If you have a more random demand profile then your average demand per week is still five, however, to cover your maximum historic demand (12) would require an additional safety stock of 7 (7+5 [runrate]= 12).

In this case the traditional thinking of using “weeks cover” is crude and unwieldy using a statistical method, choosing

a “service level” (all available within Excel or PowerBI) can then help you optimise your demand profile against a defined service level.

The standard deviation of my sample (calculated in excel using stddev.s) is 3.35. Then, mathematically and for a desired service level of 90% fulfilment, I should carry a safety stock of 4.28, 95% = 5.494, 99% = 7.8, 99.99% = 12.5. That simple calculation can reduce your safety stock holding by more than 50% and you could implement it this afternoon, using excel!

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