Managing supply risk – are you prepared for a supply chain casualty?

Disruptions in a business supply chain are at times unavoidable.  However, the true testament to a company’s ‘preparedness’ for a disruption is its ability to respond quickly.  In today’s business environment, supply chain procurement is not just about sourcing the best counterparty.  It should consist of having a contingency plan in place when something goes wrong or worst case scenario, when a ‘business casualty’ occurs.

What to consider?

The Federal Election is now behind us, the RBA has announced another rate reduction, commodity prices are trending north, major banks have emerged from the Royal Commission and all of these point to a general de-risk in supply chains across Australia.  Whilst this may be true for some, a number of other factors can lead to the failure of a supply chain counterparty. It is essential that organisations and procurement professionals continually consider:

  • Analysing supply chains to identify highly concentrated areas that may pose a risk to business operations should a disruption occur;
  • The appropriate supplier mix and supply framework, including the potential use of primary or exclusive suppliers versus panel or secondary suppliers;
  • Assessing and strengthening procurement processes and controls;
  • Conducting robust operational, financial and legal due diligence as part of the procurement process prior to contracting with new suppliers.  Due diligence should be tailored to the type of contracting activity and whether an organisation acts as a principal, contractor or subcontractor;
  • Ongoing and regular contract management and due diligence of supply chain counterparties, including ensuring that SLAs, KPIs and financial reporting requirements are relevant for the contracting activity and report on ‘early warning’ signs of distress; and
  • Having plans or strategies in place across the supply chain to mitigate the risk of disruption or the impact of a counterparty “casualty”.

The recent collapse of RCR Tomlinson Ltd in 2018 highlighted the importance of supply chain management to a number of organisations across Australia. Many thought that a listed, established company with a trading history of over 100 years resulted in little or no supply risk. However, supply chains across Australia were thrown into a state of disruption following the appointment of Administrators just before Christmas. In the following months, our Restructuring team worked with a number of RCR’s large contract counterparties to de-risk and facilitate continued supply, then later transitioning supply arrangements to parties who had acquired certain RCR business units.  Our team also experienced similar issues with the failure of Hughes Drilling, which caused major disruption to mine exploration and production plans. 

A critical element that was evident during these engagements was the varying levels of ‘preparedness’ for supply chain disruption. Whilst some contract counterparties had plans and strategies in place which kicked in, others found themselves scrambling under the weight of uncertainty. How would you or your organisation react to disruption and would you be prepared in the event of a supply chain “casualty”?