Active Risk Management for Stable Supply Chains – Is the Just-In-Time Model Dead?

The past few years have taught us a lot about crises and lack of precaution. One thing above all: Crises are inevitable. They come and go; some keep us busy longer than others. An old saying goes: Better safe than sorry. But how do you plan for the unpredictable? What measures do companies need to plan ahead for century events like pandemics and global supply shortages?

Crisis management is closely linked to risk management. Crises are usually unexpected events that occur suddenly. Risk management, on the other hand, must address known and expected risks with plans on how they can be mitigated through specific measures. Particularly in view of supply and delivery bottlenecks, companies are faced with the task of preparing for crises and risks in equal measure. The reality often looks different.

Studies Show: Companies Show Massive Backlog Demand for Risk Management

The German Association of Materials Management, Purchasing and Logistics (BME) and Fulda University of Applied Sciences conducted a study about risk management at the end of 2020. As stated in the Supply Chain Risk Management (SCRM) study, almost half of the companies surveyed experienced a medium to very high effect on their supply chains after just a few months of the pandemic. According to the study, only about one in five of the companies surveyed had established an organizational unit for supply chain risk management at that time.

The Supply Chain Management Trend Report 2021 from INFORM sheds light on the development of digitalization in supply chain management. The results show that most of the companies surveyed consider the digitalization of their supply chain management (SCM) to be crucial to face future crises with more resilience. In addition, the majority attribute a high to very high importance to the digitalization of their supply chain. The importance of a secure supply chain is therefore undisputed. Yet, there are still obstacles for companies to overcome.

“For 163 of 190 companies surveyed, digitalization of supply chain management has high or very high importance.” 

Digital Transformation of the Supply Chain as the Basis

One cause of these obstacles is the lack of fundamental foundations for active risk management in the supply chain. Why is that? In most cases, companies lack the time as well as the necessary data transparency. The digital transformation of the supply chain provides this transparency and thus the basis for sound, reliable decisions. Furthermore, it opens up additional optimization potential in established processes and ensures corresponding cost reductions.

Risk management in the supply chain is a project for companies that can be mastered with the use of intelligent IT systems for supply chain network design. Companies are rewarded with a security where they can face future risks as well as unforeseen crisis. However, active risk management is not a one-off project.

How Can You Recognize Forward-Looking Risk Management?

Forward-looking risk management involves continuous monitoring, calculation and planning of all influencing factors and their consequences. In companies, it starts with daily processes and ends with medium- and long-term strategies. These include, for example, the resolution of capacity bottlenecks in production or in route execution in the case of routing specifications, taking spontaneous events into account. Furthermore, the appropriate strategies help to replace the broken supply chains. This is accomplished by finding new and feasible transports between suppliers and new production locations and capacities as quickly as possible.

To Successfully Implement These Strategies, Companies Need Resources - Both Human and Financial.

Large companies can often afford an entire organizational unit to look at risk. But this is not absolutely necessary. Sometimes clarification of jurisdiction is all that is needed: Who in the company regularly checks supply chains for changes? This can be, for example, customer inquiries, acquisitions in the company or daily processes. In addition, several key issues are emerging that are relevant to companies in active risk management.

Are Just-In-Time and Strategic Planning Compatible?

The question for companies is whether, as a result of the pandemic or other events such as Brexit or the Suez Canal blockade, just-in-time will become a discontinued model in the long term. If companies act exclusively in a cost- and efficiency-optimized manner, eventually, this can backfire. After all, a lack of transparency in the supply chain can cause costs to skyrocket. That's why companies need strategies that handle the unpredictable. Of course, this does not mean the blurry view into the crystal ball. Despite the lack of predictability, many factors can be considered, and possible risks can be weighed.

Strategic risk management is not a contradiction to globalization. It does not necessarily require companies to shift production regionally and locally. The core of active risk management involves strategic advance planning so that alternative production routes are available should the worst happen. Just-in-time means that the material and production networks are coordinated in the best possible way. Consequently, a company can only ensure just-in-time on a constant basis if it engages in strategic risk management.

Active Risk Management Ensures the Predictability of the Supply Chain

Active risk management is the key to securing stable supply chains. By using supply chain network design, a resilient and sustainable supply chain can be built and maintained. Those companies that have not yet established a risk management system should take a look at past and, in some cases, current events and recognize the relevance.

The study situation is clear: Companies that do not actively manage risk are disadvantaged in both high-risk and high-crisis situations. Companies should therefore take action in good times and implement the right strategies using suitable supply chain network design software.

Software for supply chain network design, such as PSIglobal, enables an option space with proven options for maintaining material supply through the use of scenario technology. The system is designed to create and control optimal site distributions and networks. In addition, it also identifies the weak points within the supply chain. By gaining visibility into operations, the software can thus minimize risks by showing alternative supply chains. This way, there does not have to be an “either-or” decision: Companies that actively manage risk can ensure just-in-time simultaneously.