De-fragmenting the Supply Base to invest in Mitigating Risk

Just a few quick thoughts on the subject of risk mitigation in the supply chain.  As…...

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Just a few quick thoughts on the subject of risk mitigation in the supply chain.  As we move forward into the new business as usual this will be front of mind for procurement and supply chain leaders. Supplier vulnerabilities have been exposed through COVID – 19, with interruptions to normal trading circumstances placing strain on liquidity,   durability, product lead times and availability. Inevitably, this will mean a re-think on the supply of business-critical goods and services to safely manage future risk.  

Mitigating risk for certain business critical goods and services will mean more diversification in the supply chain in terms of number of suppliers and source geographies,  perhaps also bringing the primary tier supplier closer to the point of use.   More than one vendor and/or supply from more than one country will do much to protect against future capacity bottlenecks.  However,  in doing this more will have to be done with suppliers to fully mitigate the risk of input costs going up, particularly where consumer markets will not support sales price increases. Procurement and supply teams will have to think hard about where incremental efficiencies might come from,  with measures ranging from the introduction of new technologies, to working with each level of the supply chain to drive creative approaches to cost reduction.    

One area of efficiency is to reduce the number of vendors in the wider supplier base.  It sounds basic,   but supplier fragmentation (as opposed to diversification) is still common in many organisations.   Increasing fragmentation is an unconscious act across businesses, either as a result of legacy or driven by expediency and exacerbated by lack of the right controls. Fragmentation leads to a long tail of suppliers,  often accounting for up to 30% of spending.  Controlling and then consolidating this fragmentation,  can generate savings of between 10 and 20% on the cost of those goods and services,  that can be re-invested in de-risking actions. This process doesn’t need to take forever.  Good spend analysis will quickly isolate the level of fragmentation,  areas of focus and consolidation opportunity.    The right skills and business support  can then deliver savings for re-investment within a 4-6-month period.  

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