Assessing supply risks: a prerequisite for transforming supply chains and improving their resilience
A 4-step methodology
French version
COVID, the Ukraine-Russia war, the uptake of obligation towards the energy transition… Overall, the current geopolitical and ecological pressures are bolstering the risks related to supply disruption and adversely contributing to increased prices of many raw materials, such as metalsi. Nickel, palladium, and aluminum prices have climaxed compared to their historical levelsii, while the aeronautics sector is closing the doors to Russian titanium, the world's leading produceriii. In addition, risks related to environmental (carbon impact…), social (forced labor, human rights…) and industrial (mining and processing capacities…) issues persistiv.
The concerning point is that the mentioned metals are critical to heavy industries such as the automotive and aeronautics sectors, and may even be considered the core of the energy transitionv. At the same time, directives to encourage and implement are strengthening, leading to swelling of risks surrounding the supply of raw materials.
Limitations of current procurement risk analysis methodologies for companies
Based on our clients’ needs and strong experience in the field, we draw the following conclusions relating to the limitations of procurement risk analysis methods:
Existing assessment methodologies were designed for governments to guide industrial policiesvi rather than to measure risks faced by companies for a given commodity-supply chain pair.
These methodologies are difficult to adapt to fluctuations in company’s priorities (climate, energy, water, human rights, worker safety, etc).
These approaches do not enable any evaluation of the impact of measures implemented by companies.
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It is therefore advisable to draw on existing methodsvii and enrich them, particularly considering the financial and economic risks to companies’ supplies.
Companies’ risk exposure and the implemented mitigation measures driving improvement in resilience should also be appraised.
The 4 key steps of our Resources For Future methodology:
SELECTING DATA FOR COMMODITY RISK ANALYSIS
● Databases may come from public or private sources, or both.
● Efforts made by the company in terms of supply chain traceability or audits may be added to these databases over time, while results obtained through the risk analysis process will guide traceability of the project depending on identified priorities.
These traceability and raw materials risk analysis approaches are therefore guided via iteration.
ASSESSING THE RISKS
● The first step is to determine the "raw risk ": the risk related to the raw material due to a given supply chain.
● The next step is to evaluate the company’s exposure that provides a weighting of the risk. This could include dependency on the raw material, economic importance or strategic nature of the latter, substitution capacity, media exposure, etc.
● The final step is to account for the "net risk ", allowing consideration of mitigation measures implemented by the company, for instance signing of framework contracts, organization of audits and more.
PRIORITISING ACTIONS ON SUPPLY CHAINS
● The potential qualitative or quantitative costs and benefits of the risks are key to the decision-making.
● “Stress tests" (i.e. the construction of scenarios) may be necessary to anticipate changes in risks (for example, new equipment composition, change of supplier, deterioration or improvement in the political environment or ecological indicators, etc.).
MONITORING RISKS THROUGH THE USE OF A DATA VISUALIZATION TOOL
● The approach most often involves the development of a calculation model, based on decisions specific to each company: risks to be retained, risk scales, weighting, purchasing organization, etc.
● The use of adequate data visualization will encourage the company to survey its reporting requisites and navigate between the macro (portfolio of all raw materials), meso (raw materials present in a given product) and micro (a particular raw material) levels.
The benefits of our methodology
Feedback shows that companies that have adopted this type of approach have observed significant improvements in the understanding of the risks to their supply chains. It has enabled them to pilot and prioritize actions to be deployed to secure supplies and source responsibly.
This methodologyviii has proven its relevance regarding both metals and minerals as well as other raw materials (particularly plant-based) for players in the luxury, automotive and aeronautics sectors.
Its principles will be increasingly beneficial as the world moves into a new ecological, economic and geopolitical order.
