Supply Risk – Increasing importance in a weak economy
Let’s consider the example of the automotive industry in the United States. A significant fall in demand due to the economic recession has led to unprecedented reduction in demand from all the major automotive manufacturers. The Automotive value chain supported a substantial supply chain [$ trillion/ X% of US GDP]. These suppliers predominantly supplied GM, Ford and Daimler Chrysler; but also supplied in a small measure to ancillary industries. There are multiple instances where companies that depended in some measure on this vast network of suppliers are now subject to significantly greater supply risk. Say a GE Wind buys heavy duty, high precision bearings from the same supplier that supplies crankshaft bearings to GM for for automotive engines – understanding these risks is key to managing Supply Risk effectively.
Value Chain Risk
1. Capacity for a product of strategic importance [Volume or Value]
a. Available capacity in market versus demand
b. %age Capacity committed to buyer
c. Exposure to other industries
2. Strength of supplier fundamentals
a. Sustainability of supplier’s economic model
b. Relative position in peer group
c. Investment in product development and growth
Supply Chain Risk
1. Commodity type supplied by the supplier [Strategic/ Leverage/ Routine/ Bottleneck etc]
2. Relative supply performance
3. Strength of relationship
4. Exit barriers [for buyer]
a. Product Development and Design IP ownership
b. Specialized tooling [since high cost, depreciated tooling is valuable]
1. Currency Risk [driven by local economy]
2. Political Risk [buying from Africa for example]
The critical question most companies are asking – and there are more and more everyday in this economy – How do we understand what our Supply risk is? How do we manage it down or mitigate it? I would propose that any discussion of this Risk in particular has to be in context of impact on Buyer [your client or employer] in the event of a possible failure of supply, either voluntarily by supplier or through supplier going bankrupt.
Having established the context, I would propose that this risk has to be evaluated in context of the entire supplier base, commodity strategy and lastly at the level of an individual supplier. All three steps are essential [to some degree] to successfully understand and mitigate risk.
Step 1: Supplier Base Assessment
This essentially is a high level assessment of the entire supplier base. Assessing risk across a buyer’s supplier base is important as it quickly identifies primary drivers of risk and allows buyer to focus on mitigating the highest risk elements first.
Step 3: Commodity Strategy
Evaluating Risk in context of commodity should be a critical component of establishing a winning commodity sourcing strategy. The key questions answered here are:
1. How much of buyer spend [e.g. high pressure oil seals for a Hydraulics Manufacturer – a critical item] is focused on a single supplier?
2. How much of the lead supplier’s capacity is committed to buyer?
3. What alternative sources of material does buyer have?
Strategies for “Strategic products” versus “Routine” or “Leverage” products are very different.
Step 2: Supplier Performance
Supplier performance is a key input into the evaluation of risk from a performance failure standpoint. These are fairly well understood and part of most supplier performance management systems
Do not be the company that discovers they have unaccounted for risk in the supply chain when a strategic supplier you place a purchase order is no longer in business! Mitigation strategies range from having a supplier performance balance score card closely monitored through a real time dashboard [Tactical] to a fully functionality Supplier Accreditation program [Strategic].
While the tactical approach addresses the immediate risks, it does not provided adequate insight into the future. Additionally, the performance score card is fairly transactional in nature. Most suppliers will not share information that they are at financial risk voluntarily. They may continue to perform well till the last day of operations completely blind-siding the Buyer. Agreed that this is an extreme scenario but it is plausible without a more complete approach to Supply Risk.
The supplier accreditation program is in some ways the “Cadillac” of Supply Risk mitigation strategies. A well constructed program would take into account both Performance/ Commodity strategy as well as assess fit from a future strategy standpoint [position in Value Chain/ brand recognition etc]. It will identify and enforce a true partnership across multiple forums. The deeper information exchange and engagement would enable the buyer to identify potential risks early and address them proactively – replacing those suppliers that continue to pose significant risk.
Have you assessed supply risk for your organization lately? Do you have a Supplier Accreditation program in place to mitigate supply risk? I look forward to your comments on this blog…