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Managing Supply Chain Risk in an Economic Downturn

By Avetta Marketing
October 20, 2022
7 minutes
Managing Supply Chain Risk in an Economic Downturn

Many are predicting an economic downturn due to inflation rates, recent market performance, and continued global uncertainty caused by events like the Russia war in Ukraine. Forward-thinking companies are starting to prepare now.

A huge lesson from the COVID pandemic was just how fragile supply chains are, and how dependent businesses are on them. When storms are ahead, we tend to see two types of company reactions: those who stay with the “status quo” and those that accelerate IT investment and digitization.

The digitization of supply chain risk management (SCRM) is still growing. Surprisingly, even post-COVID pandemic, recent Gartner research cited that only 21% of supply chain organizations believe they have a highly resilient network today. The best way to weather any upcoming downturn is to improve supply chain resiliency, particularly focusing on digitizing supply chain risk and compliance.

The following are five reasons companies should double-down on their SCRM IT investment before heading into an economic downturn.

1. “Status quo” SCRM operations require significant resources

Avetta did a study on how many full-time employees (FTEs) it takes to proactively operate a successful SCRM program without technology. Our findings show that it takes 18.3 FTEs to proactively manage every 1,000 suppliers. That’s an average of $2.2 million per 1,000 suppliers.

What do we mean by “proactively operate a successful SCRM program”?

  • Collecting your organization’s global safety, environmental, ESG & sustainability, legal, business, insurance, and compliance requirements
  • Onboarding suppliers and sharing these compliance criteria with them
  • Collecting documentation and evidence to assess whether they meet these criteria
  • Sending documentation back and providing feedback on gaps if a supplier does not meet your company’s requirements
  • Ongoing safety, ESG, financial stability, sanctions list, and worker compliance monitoring
  • Supplier support, messaging, and communications
  • Site induction, terms and conditions, and corporate and sustainability training
  • Contract worker compliance, including site access and badging

2. Manual operations cause more incidents

The simple fact is that no company dedicates 18.3 full-time employees per 1,000 suppliers to manage their supply chain operations. This means that good compliance operations are either not done or are conducted by people who are doing other jobs. As a result, suppliers are likely not trained, educated, or monitored well, which translates to more incidents, accidents, and out-of-compliance events.

3. Incidents are expensive

The National Safety Council (NSC) cites a safety accident as costing $47,000 per accident, and a fatality costing $1.2 million per fatality. Countless other types of incidents (environmental, cyber, financial, etc.) can impact your supply chain and are each quite costly, including the following examples.

4. Supply chain disruptions are costly

A Gartner article on SCRM cited that 89% of companies experienced a supplier risk event in the past five years. In this McKinsey report, they stated a long-term disruption could cost companies 30-50% of a year’s EBIDTA and even a disruption that lasts only 30 days could equal losses of 3-5% of EBITDA. Disruptions are caused by accidents, natural disasters, key suppliers going bankrupt or caught in fraud, a cyber-attack, sanctions violations, and many other hidden risks.

5. Brand damage is the most expensive

Many brands don’t recover when they are caught doing business with a contractor involved in a dangerous activity or illegal operations like bribery, child labor, or slave labor. Also, if a supplier leads to an accident or data breach of confidential information, it’s the organization that hired them whose brand is damaged, regardless of whether the liability for the event sits with the supplier.

Harvard Business Review found that 70-80% of an organization’s market value comes from intangible assets like brand reputation. In a study by The Economist, business leaders say the biggest consequence of supply chain disruption is “tarnished brand reputation.” 30% of those leaders have seen more customer complaints due to supply chain issues, and 23% saw less business from regular customers.

The Solution for a Strong Supply Chain

Deploying a multi-risk, global SCRM platform like Avetta One can not only surface hidden risk in your supply chain but can also streamline operations and profitability.

Here are three critical reasons for digitalizing your SCRM program on a platform like Avetta One:

  1. 1. Resiliency: Organizations that use the Avetta One SaaS platform can see whether their suppliers have credit problems, liens against their business, a history of safety or environmental incidents, past or current legal proceedings, sanctions violations, or do not have complaint polices or programs in place. These are leading indicators of the health and risk of any supplier that a company may depend upon. If a supplier is at high risk, companies can use the Avetta pre-qualified network to source alternative or backup suppliers that provide similar services in similar regions.

  2. 2. Agility: During the COVID pandemic, Avetta companies were able to communicate and deploy new COVID-19 protocols to their entire supply chains in a matter of weeks. By utilizing the Avetta messaging center and compliance tasks lists, new policies were communicated, deployed, and assessed in real-time. As new risk and compliance programs are rapidly evolving, having a digital and collaborative network to manage your supply chain will provide new levels of agility.

  3. 3. Cost Savings: Avetta has conducted many ROI and case studies with its clients. Companies that use Avetta on average see:

    • Supplier compliance rates above 80%
    • Reduced safety incidents between 10% and 30%
    • Annual savings of $8 million to $12 million

Economic storms may lie ahead, but your supply chain risks do not have to stay hidden as you weather uncertain economic conditions. The good news is an investment in a SCRM platform today will drive streamlined operations, business continuity, and cost savings that will solidify your supply chain against whatever the future has in store.

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