MATERIAL RISK MANAGEMENT

According to an article published July 2020 by Euler Hermes and Allianz Research companies are globally increasing inventories again to precautionary mitigate risk in the age of Covid 19: “Global stocks, as measured by Days Inventory Outstanding (DIOs), will increase by +3 days in 2020. The prolonged supply-chain disruption likely due to future targeted lockdowns and the precautionary stockpiling of companies will push inventories up in H2 2020. In the Eurozone, we expect inventories to contribute +1.7pp to real GDP growth in H2 2020 after -0.3pp in H1.”

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But do we know the logic a raw material or goods selection process is following? Where should we increase the inventories? The reality shows that tools to evaluate risk on possible shortage materials and to determine their influence on company´s are missing and the tools used today are not considering these influences neither are the tools setting the right priorities for the actions that need to be taken. Most companies are using logics rather based on “what has happened” instead of using a proactive approach such as “what could happen?”. An approach of this kind should start with a risk segmentation process where e.g. material importance or criticalities (e.g. how difficult a second source validation would be) are defined followed by risk treatments that will define a company´s preparedness status to any shortage and will result in proper material contingency and / or supplier mitigation strategies. Following these steps you will obtain Contingency and Mitigation Adjusted Risk Scores per sourced material or item and your risk / procurement managers can allocate their capacities and the working capital budget in an optimised way to high risk materials / items or services.

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In addition to the higher inventories on a company´s Tier 0 level the supplying Tier 1, T2 and Tier X suppliers have as well increased their inventories. But do these Tier X supplier use a proper logic and are they really increasing inventories of the right materials / items from a Tier 0 perspective? Not only that they are most like using a rudimentary approach to define which materials are under risk Tier 0 suppliers do not have the necessary knowledge how their Tier X chain would look like and if the increase of inventories of their sub suppliers do really substantially and effectively mitigate their risk at Tier 0 level.

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Inventories on each Tier X level can be tokenised via a Blockchain system that connects materials / items along the supply chain t an inventory token or the Blockchain can reproduce the supply relations between the different Tier levels all the way down to the Tier 0. Tier 0 companies can pass along their favourable interest rates to their suppliers in the chain to proactively fend off price increases that will most likely come in the next weeks or months.