By learning to proactively manage supplier risks through digital strategies, companies can mitigate the adverse effects of disruptions, enhance supply chain resilience, and stabilise cash flows in the face of uncertainties.
“A strategy is necessary because the future is unpredictable.” — Robert Waterman
Reducing cash flow volatility has always been a strategic goal for companies across various industries. A key aspect of achieving this goal is implementing proactive risk management strategies that anticipate and address potential supply chain disruptions.
Supply chain disruptions can have a significant impact on a company’s cash flow. When a disruption occurs, it can lead to delays in the supply of raw materials, components, or finished products. These disruptions can result from various factors such as natural disasters, geopolitical events, logistics issues, supplier bankruptcies or labour disputes, and lead to production stoppage and revenue losses.1 The consequences of these disruptions can affect a company’s financial performance and cash flow stability.
However, with the advancements in digital tools and technologies, businesses can now leverage these resources to assess supplier risks and enhance supplier relationship management. The ability to proactively manage supplier risks through digital strategies can help mitigate the adverse effects of disruptions, enhance supply chain resilience, and stabilise cash flows in the face of uncertainties.
In this article, we explore how digital strategies can play a crucial role in proactive supplier risk management, enabling companies to mitigate risks and optimise their supply chains in anticipation of potential supply chain disruptions.
Leveraging Digital Tools for Risk Assessment
With the increased availability of digital tools, firms can now assess supplier risks more effectively. By leveraging data analytics and intelligence platforms, companies can gain deeper insights into their supplier base, identifying potential risks and vulnerabilities. These tools provide a comprehensive overview of supplier performance, financial stability, and compliance with regulatory changes, allowing businesses to make informed decisions and implement proactive risk mitigation measures. The landscape of supplier intelligence platforms keeps evolving, and at the time of writing this article, the major players are listed in Figure 1.
Integration of Supplier Relationship and Risk Management
Leading companies are recognising the value of integrating supplier relationship management with risk management capabilities through the utilisation of digital tools. By combining these functions, businesses can enhance supplier visibility and establish stronger partnerships with their suppliers. Digital platforms enable the seamless sharing of information, fostering collaboration across functional areas and facilitating the proactive identification and mitigation of supplier risks. This integration ensures that risk management becomes an integral part of the supplier relationship management process.
Actionable Insights and Targeted Sourcing Strategies
The adoption of data analytics tools such as Craft further enhances supplier visibility and enables the transition from raw data to actionable insights. By analysing large datasets, companies can identify patterns and trends, allowing for more targeted sourcing strategies. These strategies can consider global regulatory changes, ensuring compliance and minimising supply chain disruptions. Digital tools empower businesses to optimise their supplier base, select the most reliable partners, and proactively manage risks associated with sourcing and procurement.
Using Generative AI to Manage Supplier Risk
With the increasing availability of generative AI tools like ChatGPT, a new source of supplier risk intelligence has become available at the organisations’ fingertips. AI offers valuable capabilities for managing supplier risk by analysing unstructured data sources, web crawling, enhancing supplier evaluation, and improving supply chain forecasting accuracy. However, while AI is still in its infancy, human expertise and judgment remain crucial for validating insights and making strategic decisions based on the generated information.
Supply Chain Finance and Risk Mitigation
Supply chain finance offers opportunities to reduce the risk of bankruptcies by optimising payment terms for both small suppliers and large buyers. For example, PrimeRevenue is a service provider which enables businesses to improve cash flow, provide working capital to suppliers, and foster financial stability within the supply chain. However, caution must be exercised when implementing supply chain finance programmes, as there are instances where it has led to risky situations (think of Carillion or Greensill). It is essential to establish robust risk management frameworks and evaluate the potential impact of supply chain finance on overall supplier risk exposure using digital tools and information available through RapidRatings, Moody’s or S&P Capital IQ.
Establishing Risk Appetite and Allocating Risk Capital
Finally, the implementation of economic supply chain risk capital allows companies to define their risk appetite, allocate risk capital to business units, and evaluate performance on a risk-adjusted basis.2 By quantifying risk exposure and assessing potential losses, businesses can make informed decisions regarding risk management strategies. Digital tools can assist in measuring and monitoring risk metrics, providing real-time insights into the effectiveness of risk mitigation efforts. An example of a platform providing this emerging capability is the RAAD360’s partnership with Microsoft.
Putting Strategy into Action
In an era of increasing supply chain complexities and uncertainties, digital strategies play a vital role in proactive supplier risk management. By leveraging digital tools, companies can assess supplier risks more effectively, integrate risk management with supplier relationship management, gain actionable insights for targeted sourcing strategies, and optimise supply chain finance practices. Furthermore, the implementation of economic supply chain risk capital empowers businesses to establish risk appetite, allocate resources efficiently, and evaluate performance in a risk-adjusted manner. By adopting these digital strategies, organisations can enhance their ability to mitigate supplier risks, reduce cash flow volatility, and achieve long-term success in today’s dynamic business environment.
The execution of digital strategies needs to be accompanied by finding internal stakeholder buy-in, which can only be achieved if the digital tools in question are recognised by the business leaders. This necessitates close coordination among various functions beyond procurement, supply chain and technology and requires skilled resources who understand the data and the consequences of data-driven decision making.
About the Author
Dr. Kamil J. Mizgier is the former Global Supplier Relationship and Risk Management Leader at Dow with 15 years of experience in implementing risk management strategies across industry sectors. Before this role, he led enterprise risk modelling projects and teams, among others, at BNY Mellon and UBS. He has published more than twenty academic and practitioner journal articles on risk management and is a frequent public speaker. He obtained his master’s degree in applied physics at the Warsaw University of Technology and a PhD in supply chain management at ETH Zurich.
References
1 Schlegel, G.L., & Trent, R.J. (2014). Supply Chain Risk Management: An Emerging Discipline (1st ed.). CRC Press.
2 Mizgier, Kamil J. (2022): The Path Forward to a Unified Risk Framework. The European Business Review, January-February 2022, pages 8-11.
