The coronavirus pandemic has created a sea of red flags in every company’s supply chain. When each alert indicates a possible disruption, which ones do you act on?
First thing to do is determine criticality. Which third parties and which goods and services are absolutely critical to the operation of your business?
“You can’t possibly deal with everything at once,” said Linda Tuck Chapman, author and president of Ontala Performance Solutions, during a Webinar hosted by NAVEX Global. Focus on the goods and services in your company’s supply chain that are absolutely critical, she said.
In good times, a supply chain is a collection of trusted relationships. Many of these suppliers have proven reliable over many years, and have acted in good faith. These are not good times, obviously. Even so, there are opportunities on both sides for open negotiation, flexibility, and a joint search for solutions.
And recognize that what is critical may be shifting as the pandemic strengthens or wanes in various parts of the United States and the world.
“What is critical today might not be critical in three weeks or three months,” she said. Or, it might be more critical as economies in regions of the United States and around the world slowly reopen.
Another way to determine criticality is to examine where your company is spending the most money. “Spending is not a risk, but it is a sign of importance,” she said.
Once you’ve determined criticality, focus on which risks are most worth watching. Geography is top-of-mind.
The coronavirus has turned some third-party risks upside down. A U.S.-based supplier that once posed little risk to another U.S. company now poses lots of new and concerning risk, depending on local shutdowns, number of local infections, and more.
Companies located in areas hard hit by the pandemic will have trouble delivering because of shutdowns and stay-at-home orders. Having too many suppliers in one of those areas is another problem, said Daniel Hartnett, associate managing director for compliance risk and diligence at Kroll, a division of Duff & Phelps.
“They are probably all getting knocked offline at the same time. You’ve got a concentrated dose of risk” if that’s the case, Hartnett said.
The risk of financial failures of companies within a supply chain will be more pronounced during the pandemic as well. Suppliers at risk of failure before the pandemic shutdowns hit are probably in big trouble, but lots of previously dependable third parties are at risk of bankruptcy as well.
Think of your supply chain not as a series of links, but as a web. Some suppliers are interconnected in many places, and touching one node in the web “can be felt in every link that’s connected to it,” said Chris Lynskey, vice president of product at Interos, which uses artificial intelligence to power its supply chain risk management tools.
The key to navigating these new risks is to find alternative and duplicate suppliers or to be able to ramp up previously underused suppliers quickly. Companies should be working now to complete due diligence on new suppliers, having them ready to deliver quickly. And location is newly important—many companies are seeking to reduce their use of Chinese suppliers in favor of those in other parts of the world, like Mexico and South America.
And though speed is important, “now is not the time to skimp on supplier screening,” said Julie Myers Wood, CEO of Guidepost Solutions, a global compliance, investigations, and security firm.
Onboarding new third-party suppliers without adequate screening opens companies up to whole new areas of risk, said Hartnett.
“As companies are looking to recover, more third parties might be willing to cut corners,” he said. They could start using a different source material without notification, accept counterfeit or substandard goods, or use bribery to acquire hard-to-source materials, as just a few examples.
Trust but verify
All that being said, recognize that your third parties are dealing with the same issues your business is dealing with. This is a shared experience.
In good times, a supply chain is a collection of trusted relationships. Many of these suppliers have proven reliable over many years and have acted in good faith. These are not good times, obviously. Even so, there are opportunities on both sides for open negotiation, flexibility, and a joint search for solutions.
Maintain a regular dialogue with your most vital suppliers. A lack of communication could be a red flag worth caring about.
“This is not the time to believe that no news is good news,” Hartnett said.
The pandemic has created a chaotic business environment in which no one can depend on standard operating procedure, said Julie Park, product liability litigator at Morrison & Foerster.
“Everyone is going to be flying by the seat of their pants. What is reasonable in normal times may not be standard for this period,” she said. So strive to be organized and disciplined on your company’s end.
In all conversations with your suppliers, “You want to make sure you’re speaking with a universal voice. You want to have a consistent message,” Park said. One department should not be telling suppliers one thing, while another department is saying something else.
Every conversation with third parties needs to be documented—calls, video calls, e-mails, texts, voicemails, and more—and those contacts between all of your company’s divisions and departments need to be stored in a central location.
“You want to keep detailed records of the scramble you’re going through, because this is going to play out over months and years,” said Mark Zebrowski, a Morrison & Foerster commercial litigation partner. Having detailed documentation will protect your company if relationships sour and the lawsuits start flying, he said.