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Why Is Integration Key To Reducing Risk In The Supply Chain?

August 22, 2013BY AMS Editor

Deepening ties with business partners can help wholesale and retail distributors reduce their exposure to risk in their supply chain.

According to an article on the Supply Management website, most senior executives at a recent debate on risk and supply chain management strategies agree that “integration is a more effective way to manage risk than to hedge against it.”

“To develop and manage your supply chain holistically, you need significant integration with both your customers and your suppliers to have better input in developing your risk strategy,” said Phil Joss, the director at 4C Associates, a procurement solutions company. The thinking is that hedging can be effective for dealing with rising commodity costs, but integration is needed to protect against threats from natural disasters, quality control issues and reputational hazards.

The article suggests that collaborative relationships, combined with greater integration, are the best ways to deal with risks in the supply chain. It is always a good supply chain management practice to manage risk by establishing long-term purchase contracts with key suppliers. This helps to ensure that there are no surprises, as the suppliers are contractually obligated to meet certain fulfillment levels and prices.

There’s also a cost benefit to having long-term contracts. If you’re always looking for new suppliers, you’ll spend a lot of money on integration to get your systems, processes and people aligned with these new suppliers and their new ways of doing business. Sharing risk is a part of long-term contracts, and it’s not a bad thing; it puts the “partner” into the term “business partner.”

The Supply Management article also notes that distributors are exploring whether to “pass risk down the supply chain through contracts.” This is much more attainable today with cloud-based distribution ERP systems that have hooks into social media as well as trading networks such as Ariba. SAP has recognized the need for supply chain collaboration, as evidenced by its recent acquisition of Ariba.

The bottom line is that managing and sharing risks is vital to supply chain management. Better supply chain integration, deeper business relationships and collaboration all play an important role in mitigating risk in your supply chain.

Source: Supply Management, July 2013

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