The impact of the COVID-19 pandemic is still being felt across the world’s supply chains as we’ve seen the most significant global disruptions in history. The pandemic served as an unfortunate wake-up call for companies that black swan events can and will happen, and they require a swift and immediate response.
This disruption highlighted large gaps in the contracting processes and technology within many organisations and there are important lessons around supply chain transparency, supplier risk and contract operations that we need to take on board into 2022.
We don’t have the supply-chain visibility we think we do
Before COVID-19, surveys consistently showed that procurement leaders felt confident about the level of visibility they had into supply chains. However, just six months into the pandemic, the number of leaders who felt they had sufficient visibility dropped dramatically. This is because before the pandemic, the essence of supply chain transparency was not fully understood.
Companies thought it was sufficient to understand who their Tier-1 suppliers were; in truth, effective supply chain management requires visibility down multiple tiers to understand how different disruptions will affect them.
Historically, suppliers have been reluctant to share details of their own sourcing strategies for fear the buyer will circumvent them. However, AI-powered software uses blockchain technology to enable all participants of a supply chain to upload their supplier contracts to a restricted consortium that can extract information like location and compliance documentation, without divulging sensitive information.
A year ago, this may have sounded like futuristic technology for procurement leaders. However, the pandemic has proven the need to move fast on advanced digital solutions to enhance supply chain visibility and optimise costs.
It’s not enough to manage risk
Prior to the pandemic, many businesses assumed that risk is unlikely, and it is procurement’s job to manage the consequences of a supplier failure. This approach only makes sense on the assumption that global, catastrophic disruptions are impossible. However, COVID-19 has taught us that global disruptions are inevitable, and companies must go beyond risk management and work towards risk prevention.
Companies should look to the very beginning of a supplier relationship—the process of selecting a supplier and getting them under contract—as a key moment to preventing risk. This should involve understanding the supplier’s inward supply chain for lower tiers to understand the ultimate sources of supply. With today’s software, companies can link public information sources such as D&B to their contract management system. This means potentially risky suppliers get flagged early in the process before any agreements are signed.
Advanced contract management software can actually monitor contract negotiations in real time and provide risk scoring based on language modifications to the contract. This powerful AI technology gives procurement leaders the intelligence they need to stop risk before it enters the system.
Contract intelligence software is now enabling procurement teams to unify all this information into an ‘Integrated Supplier Risk Assessment’. This assessment can serve as a single source of information on the risk potential of every relationship, enabling procurement leaders to build a much more resilient supply base.
Contract deviations can be an early sign of risk but only if detected
While risk is inevitable in business, the question is how best to identify problems in the supply chain so companies can address them. The early detection of supply chain failures is critical to quickly respond, develop contingency plans, and stay on top of a crisis.
One of the most effective ways to detect risk early is by monitoring contract compliance. If a supplier begins to deviate from their contractual commitments, it can indicate that there are problems in need of immediate attention. However, these contract deviations are rather difficult to detect if the associated contracts are not connected to the business operations. Therefore, it is an emerging best practice to connect contract data to the systems where transactions occur. By doing so, terms can be enforced, and deviations can be addressed before bigger problems emerge.
Ultimately, advanced procurement departments are adopting processes and tools in which their entire supply chain is visible, supplier risk is closely monitored and optimised, and supplier failures are detected early and addressed immediately. The combination of AI-powered software and robust processes make companies more resilient and ready to respond to both black swan events and mundane challenges that have long caused leakage and risk for procurement organisations.