Importance of Master Data Management in the Supply Chain at Times of Crisis
Earthquakes, tsunamis, pandemics, inclement weather events, political unrest and even war. These seemingly “once-in-a-lifetime” events are not nearly as uncommon as organizational leaders would like to believe. And who is to blame them?
As psychologists Tversky and Kahneman suggest, humans are not very good at understanding the likelihood and severity of highly improbable events. When these events do materialize, organizations segregate the losses as ‘nonrecurring’ line items on financial statements to indicate that these do not stem from doing business as usual. However, savvy financial executives understand that not all firms manage their risks equally well. Analysts are increasingly including nonrecurring items in their analysis and financial forecasts.
Risk Management Factors
Master data management is an integral part of a well-rounded enterprise risk management strategy. Firms with established master data management capabilities have clearer visibility into their customers, suppliers, and products and thus are better positioned to deal with the unprecedented, whether it be a natural disaster, a pandemic, a disruptive competitor, or a change in the regulatory environment.
Take customer information as an example. Organizations that grow organically or through acquisition will typically have numerous systems hosting customer master data. That impedes the organization’s ability to gain a clear picture of the amount of purchasing from their largest customers, especially if the customers purchase under different legal names or accounts, as is often the case. It is not possible to provide an appropriate level of service to mitigate the risk of losing large customers without clear visibility into who the customers are, their contact preferences, where they are located, and which geopolitical or other threats they are susceptible to.
A similar problem exists on the inbound supply chain side. Large enterprises source materials from a complex network of suppliers and manufacturers. Each supplier, in turn, may source their inputs from many sources. What appears to be a robust and well-diversified supplier base at the first or second tier, may have one specialized supplier at the third tier which is a single point of failure with the potential to undermine the entire supply chain. Organizations can improve their supply chain resilience by gaining visibility into highly relied-upon suppliers and shipping lanes by deploying risk mitigation strategies such as diversification or partnership.
Master data management establishes a clear line of sight to which products are most dependent on which suppliers, whether substitute parts are available and how and when they can be sourced, which suppliers and manufacturers are located where, and what shipping lanes are in effect. Together this information can enable the organization to understand and anticipate risks across its business units and can serve as the foundation for a strong risk mitigation strategy.
The Importance of Defining an Information Criticality Horizon
It is worth noting that it is very difficult, if not impossible, to accurately model the entire inbound or outbound supply chain in an MDM solution. Organizations should segment their suppliers and customers based on business criticality and categorize each segment within an information criticality horizon. Information horizons define how much data is gathered by organizations about their customers and suppliers – how far up and down the supply chain an organization can see – based on critical factors such as the strategic importance of 3rd parties.
Enterprises should draw these horizons depending on how they define their tiers of criticality. Highly mature data-driven organizations will have a pragmatic approach, where a set of key data elements produced by strategic customers and suppliers are gathered, stewarded, and tightly governed. This ensures that the most critical supplier impacts, both direct and indirect, are under control. A smaller set of data points should be gathered and perhaps even loosely governed for ad-hoc trading partners. The priority and response levels of the risk mitigation efforts should increase proportionally to the criticality of the suppliers.
In the case of low data maturity enterprises, starting with only the first tier of Information Criticality Horizons will be the best fit to support a longer-term vision, especially in the absence of confidence in organizational readiness.
MDM Business Case
Organizations commonly look at benefits such as ‘single source of truth’ and ‘data quality’ when evaluating the business benefits of an MDM solution. These benefits can be abstract, so it is not always apparent how they impact a business’ top or bottom lines. Thus, it is paramount to apply a business-focused interpretation to these benefits. For example:
Single source of truth for customers:
- Improves customer experience and satisfaction
- Enables more effective marketing and customer retention activities
- Reduces collection activities
- Expedites billing
- Mitigates risk by highlighting over-dependence on certain customers
Supplier data quality:
- Enables purchasing negotiation leverage
- Unlocks volume and early payment discounts
- Expedites procurement
- Reduces duplicate parts, first article inspections and supplier approval efforts
- Mitigates risk by increasing supply chain resilience
To bolster risk-related benefits of an MDM business case, consider the history of nonrecurring losses, realized risks, and other seemingly “once in a lifetime” adversities that have impacted the enterprise. Evaluate which of those events could have been avoided altogether or their impact mitigated with advanced supplier, customer, and product analytic capabilities. An established master data management practice is the foundation that supports risk-related and other business decision making.
When creating financial forecasts, organizations need to start taking into account unpredictable events. How? Master data management establishes a clear line of sight to which products are most dependent on which suppliers, whether substitute parts are available and how and when they can be sourced, which suppliers and manufacturers are located where, and what shipping lanes are in effect. Together this information can enable the organization to understand and anticipate risks across its business units and can serve as the foundation for a strong risk mitigation strategy.