How to Navigate the Many Risks in Your Supply Chain

Sept. 9, 2016
The sheer magnitude of supply chain complexity can add to the pressures of managing enterprise risk.

North American shippers are experiencing seismic shifts in the global supply chain, as customer demand and increased complexity raise the threat of enterprise risk. Supply lines grow longer and competition increases daily.

Exponential growth of the omni-channel market strains manufacturers' ability to bring products to market, and it challenges their ability to adapt and provide the speed, choice, agility and visibility required to satisfy end-customers' buying and delivery expectations. Demand volatility and regulatory protocols add to the challenges in an economic climate where sales in many companies are generally flat year-over-year, and slow growth has become the new normal.

In this environment, financial and operational risks are greater than ever.

Some are well known throughout the organization. Other risks are not as visible but can cause just as much economic hardship.

While understanding and utilizing a traditional risk management program can be sufficient for many companies, a more mature, better business-value approach recognizes that risk management is a critical part of any sustainability strategy. It is no longer enough for organizations to maintain a complete understanding of their streamlined processes, lean improvement programs and enterprise-wide communications. To grow and succeed, it is imperative that enterprise leaders effectively identify and demystify all layers of risk in order to expand into new markets and sustain a competitive advantage.

Risks from the Strategic Level

Complex Business Decisions. As companies grow, either organically or through mergers and acquisitions, leaders making pivotal business decisions must remain cognizant of the state of their industry in North America and the world. The rapid pace of change in the business environment is reaching record speed, and added challenges are exacerbated by growing volatility in global economies. Relying on inaccurate, incomplete or untimely data hinders executives' ability to make the most intelligent decisions that affect the bottom line.

To mitigate the risk of less-than-optimal insight, forward-thinking leaders collect real-time data from across all elements of the supply chain and supporting business processes to gain critical insight into what is actually happening inside and outside company walls. Real-time, current-state awareness can uncover barriers to success and vulnerabilities to risk. With advanced analytics and leading-edge technology, market leaders create actionable, interactive business intelligence with customized views of data to develop and quantify continuous improvement strategies.

One electronics distributor battling to remain competitive in a crowded marketplace examined this kind of data across its supply chain in order to guarantee top-notch service where shipments arrive on time, in full and undamaged. A deep focus on historical data allowed the company to reduce its number of distribution centers while maintaining the ability to deliver products on time. Likewise, analyzing current state practices, the distributor determined that customers were happy with shipments in two days or less for certain rates, rather than paying higher overnight charges. With a more complete understanding of business trends and service requirements, this company reduced expenses without impacting customer expectations or satisfaction.

Growth Strategies. During periods of slow economic growth, it is critical to establish plans for the future and execute against the plan, deploying resources and expertise as needed. This is especially true with the emergence of new revenue growth avenues, such as the booming e-commerce segment of the economy. Many businesses, however, underestimate the level of risk involved in expansion, and as a result, they unknowingly limit their growth. What if you enter the wrong market? What if you don't have the right parcel and e-commerce platform? What if you need more warehouse space to hold your expanding inventory?

Market size and revenue opportunities are important factors to consider when evaluating new markets, but expansion "what if" scenarios need to include extensive calculations to determine the financial requirements of entry, logistics, customer services, manufacturing, warehousing, distribution and all other supply chain functions. More than just the capital losses incurred when setting up new facilities and services, an unsuccessful venture into a new geographic market adds risk that can strain existing operations, compromise product quality, and damage your brand reputation with customers and suppliers alike.

Today, most progressive organizations include the growth of an e-commerce channel as part of their strategic objectives. However, growth in e-commerce and the overall omni-channel creates challenges in many companies' ability to meet increasing demands for smaller orders shipped to a much broader audience in a shorter amount of time.

Many companies reduce risk in omni-channel and new market growth by working with a partner that can expand reach with multi-modal (parcel, LTL, truckload) logistics services, add public warehousing alternatives to position products in new markets, and provide technologies to automate and manage business processes. A thorough analysis of supply chain data can further mitigate risk and validate specific business decisions regarding:

  • Site selection
  • Sourcing and distribution alignment
  • Inventory requirements and locations
  • Least landed costs.

Risks from the Financial Level

Audit and Payment in the Supply Chain. Companies do not want to pay more than they owe, but it happens in the shipping world. Errors can occur throughout the freight bill payment process, and exposure to financial risks amplifies with each untimely or inaccurate invoice, duplicate bill, or miscalculated payment. Often invoices have incorrect information in the address, quantity, contract number, rates, or customer number fields. This can be especially problematic in the parcel shipping realm where errors lead to over-charges linked to incorrect coding for size, weight and destination, or billing applied to the wrong account.

At the same time, as fulfillment operations expedite shipping processes to meet customer deadlines, accelerating the process means shippers do not always closely check their freight invoices, nor do they have the time or resources to check every document for complete accuracy. Best auditing practices require verified shipment legitimacy, secured receipt of invoice payments, accurately applied payments against invoices, and funds released to carriers quickly and correctly. Receiving hundreds to thousands of complicated freight invoices per week, companies face the risk of inadvertently paying more than 2% of their transportation budget due to invoice inaccuracies and inefficiencies.

Most shippers agree they uncover significant value by auditing their freight invoices, but because the process requires accounting associates to sift through reams of data to find discrepancies, more decision-makers are exploring alternative solutions. Companies working alongside a lead logistics provider that delivers co-management services can leverage highly educated business analysts as an extension of their organization to help process and manage invoices far more efficiently due to simple economies of scale.

Further, the power of technology delivers an added level of accuracy and efficiency in critical areas such as:

  • General ledger coding
  • Consolidated electronic billing
  • Freight accruals
  • Carrier payment and check reconciliation
  • Research and collection of refunds.

Based on the large volume of invoices shippers generate, partnering with a logistics business strategist to complete financial settlement can lead to significant savings, both in cost and time. Auditing invoices with SSAE16 Type II compliance provides additional rigor and in-depth analysis. Through a combination of error resolution, technology and data analysis, audit experts can help shippers gain control and better manage financial-related risk associated with potential fraud, security and compliance.

Cost to Serve. Cost-to-serve is the analysis and quantification of all activities and costs incurred to fulfill customer demand for a product through the end-to-end supply chain. With an accurate cost-to-serve and a cost-based pricing philosophy, businesses ensure bottom-line profitability. However, many businesses put much of their focus on external costs, but fail to track internal costs. Complete understanding of both external and internal costs is required to determine the optimal cost to serve your customers.
Accurate cost-to-serve metrics are developed by modeling all activities in the supply chain network and accumulating and properly allocating fixed and variable costs. With an accurate model, you can make decisions about which markets, customers and SKUs are contributing well to profitability and which are not.

To identify and avoid risks surrounding cost-to-serve, a consumer goods distributor partnered with a multi-modal logistics provider to complete a supply chain network design and cost-to-serve optimization. After developing an intimate knowledge of the partner's supply chain, the third-party constantly examined processes and shipment data to uncover opportunities for optimization.

Tracking on-demand reporting metrics such as claims, shipments per lane or shipments per DC delivered a true cost-to-serve for every customer. This facilitated streamlining in the supply chain network without impacting the company's ability to meet customer expectations. Overall, the company's efforts to understand its total landed cost of its products and improve its operations produced a supply chain-related savings of nearly 18%.

International Compliance. As companies reach globally to expand their markets or sourcing channels, they must deal with import and export compliance issues, making it imperative to initiate sound compliance practices. Complex rules in the international shipping landscape create significant risk exposure. Companies must keep detailed records of shipment documentation for at least five years to meet U.S. Customs regulations. Incorrect or incomplete record keeping can lead to substantial financial penalties.  

The Trade Facilitation and Trade Enforcement Act of 2016 gives and affirms U.S. Customs power in enforcing trade laws for the U.S. There have been numerous examples in the past few months where U.S. Customs and Border Protection agents have found importers and exporters in violation of trade practices, many of which reportedly had been unknowingly followed for years.
To minimize international import/export risks, leading companies perform an internal assessment of their international trade practices. These assessments identify lapses in process and documentation, and provide steps to alleviate the risk.

Risks from the Operational and Execution Level

Daily Order Execution. Insuring sold products and inbound raw materials move through the supply chain, without exception or delay, is a key component to any organization's success. Taking a hands-on approach to daily execution of shipments allows shippers to work directly with preferred carriers to determine the best service levels and practices that meet lead times and budgets. As a result, many organizations take the approach of "if it's not broken…" when assessing their supply chain, order execution and even carrier performance.

However, best practices show that a logistics partner that provides co-execution services helps give an objective view of supply chain performance and addresses risks, while allowing you to maintain frontline control. One printing ink supplier chose this approach to maintain control of relationships with customers, vendors and carriers. By empowering the business with access to transportation industry expertise across all modes, improved rate structures, cutting edge technology and accurate supply chain business intelligence, the company improved its overall business performance and created substantial enterprise value. The net result delivered a $7 million savings through inventory reduction that was facilitated by optimization of shipping and error cost avoidance in all transportation modes.

Loss, Damage or Liability Risks. Product recalls are a serious risk to consumer packaged goods producers, and any time a tainted or contaminated product threatens the health, safety and well-being of the consumer, a brand can suffer significant damage in the marketplace.

Whether your business handles consumer goods or industrial products, the ability to track, monitor and report end-to-end supply chain activities in real time is absolutely vital to maintaining—and proving—compliance and mitigating risk. You must be able to access, trace and verify data on supply sources as well as on all production, packaging and shipping procedures.

To summarize, then, while being proactive in your approach to risk management is critical for survival, research reveals that a mature sustainability strategy also offers horizon insights that can steer the organization to new business opportunities. Yes, you need an objective view of your entire supply chain to build an end-to-end value map—from raw materials to finished goods to shipment to end customer. However, to grow and succeed, companies need to leverage expertise and predictive analytics to understand all layers of risk and to develop a change management plan for improved supply chain infrastructure, technology, training and velocity.  

Rick Brumett is VP of client solutions at Transportation Insight, a multi-modal global lead logistics provider He has more than 35 years of logistics and end-to-end SCM experience.