The current pandemic has highlighted the inherent risk associated with overconcentrating any supply chain link in a geographic area. Economists refer to this concentration as “agglomeration,” and it’s tempting because there are numerous benefits, including a higher density of human expertise, decreased logistics and transportation costs, and more efficient cycle times. It’s not a matter of avoiding concentration entirely — that would be an economic impossibility. Rather, insightful business leaders should analyze and appropriately manage risk.
When is Concentration Too Risky?
The general rule is that when ten percent or more of revenue, materials or suppliers are concentrated in a single geographic area, a business faces elevated risk. Unfortunately, this isn’t always easy to determine. Listing all immediate trading partners is relatively straightforward, but what about their component suppliers? Where do they get their raw materials? Does all their material transportation flow through a central hub?
Geographic concentration risks can only be understood once a business has insight into their entire supply chain. This goes both directions and must involve everything from raw material production to final consumer sales, regardless of where your business sits on that line. If you’re closer to the raw material end of the spectrum, you still need to have a solid grasp of final consumer demand for your specific goods or services to forecast business needs accurately. Even if you’re directly involved in consumer sales and twelve steps removed from the mine where your production line starts, identifying each link in the chain is crucial to being able to adapt and overcome any disruptions.
Identifying Supply Chain Vulnerability
The first step in addressing potential supply chain vulnerability is to map the entire chain. Begin with your suppliers: list every business with which you directly interact, then begin researching who their suppliers are. Continue until you’ve identified everything down to where the raw material originates. Then, look downstream and perform the same exercise with your sales chain. Who are your customers, and who are theirs? Follow this until you can identify the final point of sales to consumers.
Next, put these on a map and identify potential hotspots of geographic concentration. This can be complicated because geographic risks can take many forms. Local weather patterns and susceptibility to natural disasters — such as earthquakes, hurricanes or tsunamis — are just the tip of the iceberg. Keep a finger on the pulse of local, state, national and international economies and political situations. If your supply chain is scattered through various parts of China, for example, you’re not at substantial risk for natural disasters, but there’s an elevated exposure to changing political and legal realities.
Don’t forget about transportation — knowing how your product travels between each stage of production is crucial. Is one company responsible for all transportation logistics at a particular stage? What happens if their drivers decide to go on strike for a month? Are there key chokepoints, such as a central bridge in a region prone to earthquakes?
Simultaneously with this step, evaluate your inventory levels. How much product or components do you keep on hand? How long does it take you to cycle through this during a normal pace of business? How long would your inventory last if there was a major supply disruption? How would the loss of one component impact your overall business operations? The answers to these questions give you one half of the puzzle; the other half is assessing the chances of disruption occurring. The balance you choose to strike between these two realities should drive the inventory levels your company maintains.
Mitigating Supply Chain Vulnerability
After you’ve identified hotspots, research alternate suppliers and vendors for each area that has the potential for severe disruption. Reach out to several and begin navigating all the requirements that come with a new business partner: establishing contacts, negotiating contracts and resolving quality control or component specification issues. This gets your foot in the door and, even if the diversification is small, it gives you the ability to pivot rapidly if a supply chain link goes down. It’s much easier to negotiate an increase in production than it is to find and establish new relationships in a crisis while all of your competitors are doing the same.
These shouldn’t be one-time exercises, but instead, need to be ongoing conversations that are revisited and reevaluated regularly. Each of these areas is dynamic, and keeping up with the realities affecting your supply chain gives you a competitive edge. Establish a process to stay up to date with developments in each area; this can be as simple as setting up news alerts for keywords in strategic areas or as involved as making it a full-time job for an employee. Avoiding risk is impossible, but identifying and managing it are critical efforts in today’s global economy.
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