The State of Supply Chain Risk Management

Beginning in 2020, the COVID-19 pandemic wreaked havoc on most of the world, but particularly on supply chains across industries. Only now are organizations beginning to find their footing again, but there have been consequences. Supply chain risks have increased exponentially, and accountants have their hands full in assessing these risks and trying to find solutions.

How much have things really improved in the past year? A recent McKinsey report offered some answers. Accountants and businesses can use this information to continue minimizing their supply chain risk going forward.

The accountant’s role in supply chain risk management

Inventory is absolutely crucial to businesses, which run on supply and demand. Without the supply, customers will look elsewhere. It’s for this reason that 32 percent of CFOs reported that sales had fallen due to shortages in 2021, according to the findings in Caseware’s Accountant’s Guide to Managing Supply Chain Distribution. 

So what is the role of accounting in supply chain management? Accountants can help mitigate risks by conducting reports on inventory values and balances, sales turnover and any outliers. Accountants can also work with order management teams to organize the budget and to create a plan for optimizing the supply chain. In some cases, companies may need to adjust their prices in order to handle their supply chain risk, and accountants can consult with the pricing teams to come up with the best strategy. 

Offering supply chain insights

Insights from accountants are essential for asset recovery and cash flow management. So what’s the supply chain forecast that accountants are looking at now? Here’s what the McKinsey report found about the world of supply chains in 2022.

Risk management progress

In 2021, two percent of respondents surveyed by McKinsey reported they had a good picture of their supply chains beyond the second tier. That number has jumped to 17 percent. While there’s still a long way to go, it is promising to see so much change in just a year. The sectors that had short, simple supply chains fared the best in this area. 

Supply chains are still a serious problem, with 83 percent of respondents saying they have experienced shortages over the past year. The difference we’re beginning to see is that businesses are becoming wiser when it comes to their supply chains, likely with the help of their accountants.

Fortified supply chain planning

Supply chain planning teams have been tested over the past few years, and the trail has made them stronger and sharper. Supply chain risk assessment has helped ensure there are fewer surprises sneaking up on businesses. The McKinsey report found there were three key elements to supply chain planning:

• End-to-end (E2E) visibility: Companies have begun implementing supply chain dashboards that allow them to watch the process from end to end. This enables them to see exactly where any hiccups might occur. 
• Scenario planning: Scenario planning allows teams to envision scenarios that could potentially disrupt the supply chain and to make a plan to mitigate those possibilities. 
• Master data: Master data helps identify key elements and entities across supply chain trading partners and even different departments. The more specific the data, the clearer the picture of the supply chain. 

The survey showed marked improvements in combating supply chain disruptions, with:

• Businesses that implemented E2E visibility being twice as likely to report no 2022 supply chain-related challenges
• Businesses that implemented scenario planning being twice as likely to report no 2022 supply chain-related challenges
• Businesses that implemented master data being 1.5 times as likely to report no 2022 supply chain-related challenges

Scenario planning was shown to be one of the most effective strategies implemented. However, only 37 percent of businesses have implemented it. On the other hand, 67 percent of businesses have implemented E2E visibility features, and 53 percent have taken advantage of sufficient- or high-quality master data.

Digitized supply chain investments

When the pandemic began to slow down supply chains, many businesses turned to digital supply chain solutions: According to McKinsey, 90 percent of respondents said they had invested in digital tools to boost their supply chain management in the past year. 

In 2021, most of these digital investments were to help boost supply chain visibility: digital supply chain dashboards, for instance. In 2022, however, most businesses became more invested in demand planning — anticipating the demand they're likely to face and planning how to meet it with minimum disruptions. This was followed by supply planning tools and then by inventory optimization tools.

Overall, more than 80 percent of surveyed businesses anticipated they would continue to invest in digital supply chain tools, such as supply chain risk management software. The survey’s findings are clear: Like many other things amid the COVID-19 pandemic, supply chains have become digital, and they seem to be better for it. 

Supply chain resilience

Given the increasing disruptions and risks that supply chains have experienced in the past three years, it’s no surprise that many businesses are prioritizing supply chain resilience. However, there’s an interesting gap in the findings of what businesses wanted to do versus what they actually did to address these issues. 

For instance, several respondents claimed they wanted to diversify their supply chain, but the survey did not seem to indicate that they had done so. Instead, most reported that they had increased their inventory — essentially the grocery store solution of buying in bulk before a storm. In fact, 80 percent of respondents reported they had increased the amount of inventory they had purchased, and they would have increased it even further if the supply chains had been able to meet those needs. 

This is not the only solution businesses are implementing when it comes to supply chain resilience: 71 percent of surveyed businesses declared they expected to revise their supply chain planning in 2022, looking for smarter, more efficient ways to push back against supply chain risks. These are the plans that accountants can help with by sharing insights from the data they’ve reported and consulting on the best action plan to take. And 81 percent of respondents said they had begun dual-sourcing their inventory, a whopping 55 percent more than in 2020. Of those, 69 percent expected to continue dual-sourcing beyond 2022.

Most businesses reported utilizing a mix of supply chain resilience strategies: inventory increases, dual-sourcing and regionalization — breaking manufacturing down into smaller blocks with more localized sources. These steps help lessen the impact of supply chain disruptions so businesses can continue meeting demand without losing customers and sales.

How can Caseware help with your supply chain planning?

Supply chain disruptions are not new. They existed long before COVID-19, but across the board, the disruptions and risks to supply chains have been significantly higher since the pandemic began. Though this has been a disaster for many businesses, there are steps you can take to protect your business and mitigate the impact from supply chain disruptions. 

Though things are looking up, most accountants are finding that the best plan is to become more resilient and better prepared. If you want your business to mitigate supply chain disruptions, you need to present a strong supply chain risk management plan. This may not be a one-size-fits-all process, but you can gain insights to identify weak spots in your supply chain before they cause problems with the help of internal audit software from Caseware. Contact us today to learn more.