Sub Tier Suppliers Are Big Contributors to Risk Exposure
Supply chains lie at the heart of millions of organizations around the world. In some cases, 50% to 80% of a company’s costs can be directly linked to supply chain efforts. In fact, one of the most common KPIs across businesses in all industry sectors is delivering to the customer on time – and if you have a disruption, you fail.
Experts at Dun & Bradstreet and Zurich Insurance often express surprise that many companies have limited visibility into which of their Tier 1 suppliers have risk and exposures stemming from sub-tier suppliers. Essentially, they don’t know who supplies their suppliers. Known as Tier N, these sub-tier entities branch out to various lower levels in the supply chain, and often little is known about their risk exposures. In some cases, these Tier N organisations appear shrouded in mystery compared to the transparency of Tier 1 suppliers.
This lack of visibility translates to vulnerability. Not knowing the depth of your supply chain leaves you open to unfortunate disruptions to “business as usual” that can cost in the tens of millions of dollars. But achieving a deep understanding of your supply chain is harder than it sounds. Data on your supply network is often fragmented, unreliable, and stratified across diverse locations and business entities. Even if you succeed in drilling down and creating an accurate map of your supply chain, the data you’ve diligently gathered becomes obsolete and outdated very quickly.
Most Global Organisations Are at Risk for Supply Chain Disruption
So, how serious are these disruption events? According to a poll taken by BCI Supply Chain Resilience in 2016, 70% of organisations polled indicated that they had suffered some sort of supply chain disruption. Within that same group, 2% of those polled revealed that they had taken a hit of over $50 million from these disruptions. Nick Wildgoose of Zurich Insurance notes, “We frequently find exposures to a single supplier that are certainly in the tens of millions [of Dollars] and sometimes in the hundreds of millions.”
Top 5 Causes of Supply Chain Disruption
- Unplanned IT and telecommunications outages
- Loss of talent/skills
- Cyber-attack and data breaches
- Transport-network disruption
- Outsource failure
And where are those disruptions occurring? Mostly around Tier 1 direct suppliers, but almost half occur below in the Tier N territory, and many companies are not actively analyzing where exactly these disruptions are happening and why. Too many organisations take the dismissive attitude of “It’s happening under Tier 1? I don’t know anything about that. Not much we can do.” These companies need to assume a proactive stance in capturing these disruptions and learning how to prevent their negative impacts across the organisation. The three primary issues we must consider when analyzing supply chain sub-tiers are:
3 Issues to Consider When Analyzing Supply Chain Sub-Tiers Are:
Hidden risk: This can manifest in the form of legislation passing in the country where your Tier N supplier is located. Or your supplier may reside in a geographically high-risk region of the globe. We all remember the devastating 2011 earthquake and tsunami that hit Japan. This natural disaster halted exports and led to a temporary stoppage of certain automotive facilities in the US. According to Allianz’s Business Risk Report of 2014, 51% of supply chain disruptions originate with Tier 2 and Tier 3 suppliers.
Poor visibility: It’s difficult to identify Tier N suppliers. Some reside in unstable countries subject to the whims of changing governments or of competing factions. You can adjust your supply chain if you know that a specific Tier N supplier manufactures items in a country on the brink of civil war. 54% of executives admit that their firms do not have visibility beyond Tier 1 (KPMG).
Top priority: You need to understand the profound impact that Tier N disruptions can have on your organisation and financial health. Simply put, Tier N disruptions can create a domino effect. According to Accenture, 80% of companies worldwide see better protection of the supply chain as a top priority. As organisations look to reduce costs, they must be careful not to increase risk or danger of disruption at the same time. To continue the journey of improvement, you need top-down support from the executive team and should align the different functional silos in your organisation to drive resilience in your supply chain.
How Organisations Protect Themselves from Tier N Disruptions?
By using advanced analytics. To protect your assets, innovative organisations like Zurich Insurance partner with Dun & Bradstreet to apply the latest, most accurate advanced analytics technology to map Tier N supply relationships and develop a plan for risk transference solutions to disruption events – even for the most complex supply chain scenarios. To learn more about how organisations are relying more and more on analytics to develop ways to protect against the adverse effects of value chain failures, watch the informative webinar Is Your Supply Chain About to Be Disrupted Again? Analytics Provides the Answer.