As I discussed in Part One, the last few years have shown business and consumers the often negative consequences of globalization, unrestricted trade, and all out web commerce. Businesses are facing increased risk across multi-tier supply chains, while at the same time struggling to get visibility into and management over the potential downsides. In Part Two, let’s look at methods to solve some of these issues.
What you can do to alleviate supplier risk
Compliance is not a dirty word. In fact creating transparency and information compliance can open worlds of visibility to opportunities (as well as protecting the company against fines and legal nightmares).
Some upside thinking here, I think, is required. There is a value in transparency so you can seize opportunities where others see disaster. Understanding volatile markets and conditions better positions your firm to know when and if to take action—knowing when to buy-up scarce supply, when to hedge, when to relax. Today, firms spend so little on supply chain risk (figure 2) that at this point increasing investment here seems reasonable to expect.
Knowing how to maintain continuity even if things go wrong so your firm maintains sales, protects people and assets, as well as assures that working capital is not drained to deal with a crisis, seems awfully important.
Here are some approaches to consider:
- Establish a cross-functional business continuity/resilience team. This should include sourcing/procurement, supply chain, risk management, customer service, finance and other appropriate personnel, with management setting expectations as well as participating.
- Understand the multi-tier—Map your supply base. Engage with the Tier 1 and Tier 2’s to host discussions, as well joint mapping.
- Build Risk Assessment into your supplier selection. Some of the risk factors that companies consider when selecting a supplier include:
- Sole-sourced/Alternative sources—Having redundant sources of supply is one of the most important risk mitigation strategies. When this is not possible, the risk profile goes up and the need to apply other risk mitigating techniques increases.
- Financial Health/Viability—Financial reports should be used, but are a rear-view mirror indicator and are not always available or reliable for private or overseas firms. In any case, they should be combined with other more forward looking stability and viability indicators, such as quality metrics or other performance data. Depending on the criticality and type of relationship, hiring investigators to review the company may be in order before you sign any agreements with the supplier.
- Supplier Performance/Quality Metrics—Metrics for existing suppliers are usually easier to obtain from internal systems. Degradations in on time performance or quality may be a sign of degradation in the financial viability for a supplier. A supplier may switch to a cheaper source of supply to reduce cost, but that material may not meet your standards, with negative outcomes often the outcome of these switches.
- Plant Locations—To what degree are the suppliers’ plants exposed to various risks such as natural disaster, geopolitical instability, geographic over-concentration of suppliers, infrastructure risks (power, transport), and so forth?
- Switching costs and timeframe—Is there a high level of time and investment involved in switching suppliers? This includes building the technical integration and relationship between the firms, and might include other things like tooling/retooling costs or certification requirements. Firms often don’t consider this in their plans.
- Supplier’s Business Continuity Policies and Practices—How resilient is the supplier? Do they have the necessary practices and policies in place to avoid, survive, and reduce the duration of disruptions? What is the company’s past history as far as events and how did they overcome them?
- Labor Management/Supplier’s Security and Hiring Practices—For suppliers handling sensitive materials and/or intellectual property, what vetting happens in their hiring processes, what is the physical security of their facilities, and do they have specific controls in place (such as separation-of-duty policies)? Are workers certified, where required, to work on your products?
- Exchange Rate Risks—Sophisticated multi-division companies may use natural hedgingto reduce their exchange rate exposures. This can play a role in supplier selection, if transactions will be based on the supplier’s currency.
- Traceability Systems and Processes—In highly regulated and/or brand-sensitive industries such as pharmaceuticals or aerospace, supplier’s traceability systems may be important. A manufacturer wants to ensure that any quality issues (whether or not they result in a recall) can be traced back to the source.
- Social Responsibility Audit—Does this supplier fulfill the supplier code of conduct? What has their past behavior been? Remember, your company’s brand reputation can be damaged by your suppliers’ actions. Also, workers are less likely to make errors and commit fraud when the working environment is fair and safe.
- Legal or Ethical Issues—Does the supplier have outstanding lawsuits, indictments, or serious complaints? Again, you may need to hire investigators to uncover issues, but it may well be worth it to protect your products and your firm from future litigation.
- Upgrade your supplier integration solutions. Companies who rely on manual processes, or messaging-only approaches can’t achieve a more ‘visible’ state. So broader supplier/customer collaboration and integration is critical. In addition, adding auto-id technology where appropriate should be considered. This adds a layer of authentication as well as can help provide information of conditions the product/shipment may have been subjected to in route.
- Create, publish and educate your supply base on risk standards and metrics.
Conclusion – Get Social
Relationship building—both from a technical and people perspective—is the key to risk reduction.
Today, even at a distance, relationships can be enabled and enhanced through social collaboration. In fact, look to incorporate a Social Supply Chain solution within your procurement system. Many of the key supply chain and procurement players are building these so the data and the people are on a common platform, sharing the same views of issues and data.
In the end, risk management is all about people—process, information and relationships. People just protect others they know. Over the years I have heard repeatedly from suppliers that when there are shortages, they fulfill first to customers who are most fair and with whom they have the best relationships, for example.
Surely, trust but verify should be the foundation to managing supplier risk.
 Even on a day to day basis, OEMs and Retailers reward suppliers with fast lane status in receiving, preferred supplier status and even increased business for compliant suppliers. So compliance has a cash-back reward! Shorter cash cycle times means freeing up working capital. And increase business is a compelling bottom line reward.
 Only a few Fortune 100-type firms spent more than $1 million on their supplier risk programs. These tended to be in Pharmaceuticals, Aerospace, a few global electronics firms, and a few global food brand companies.