7 Sourcing Risks Critical to Supply Chain Risk Management
Supply Chain Resiliency – A series of short articles
Part III: Source
By Robert Benny & Missan Eido
The supply chain is made up of a series of highly interrelated and dependent activities. Sourcing is complex due to geo-economic and geopolitical risks, and climate challenges along with country specific rules, laws and regulations. Sourcing challenges also exist due to single supplier issues, poor vendor compliance and lead time issues. Let’s look at them one at a time:
1. Geo-economic issues
• As we have moved to a global economy several interesting dynamics have taken place. First the move to low cost (or what are now being called “high value”) regions has occurred.
This has an interesting twist to it. As a major company moves to a new country or geographic region, it becomes economically feasible (it may be required by the company) for many of its major suppliers to follow suit in order to be closer to their customer.
This close proximity generally enables reduced lead times, lower inventories and improved service which are all key measures to a company’s success. However there may be several downsides as discussed in our next point, geopolitical issues.
2. Geopolitical issues
• Once a vendor has relocated, they are close to the customer, but have they assessed the risk to the supply chain if political disruption occurs in the new neighborhood? What if the supplier is a single source for a critical part and the country they are in – although different than where you are located — has a major political disruption resulting in supply cutoff? Politics also plays a major role in quality (although perhaps not an obvious one). Perhaps a company manufactures surgical instruments or pharmaceuticals in Asia and the raw material supplier comes from either the same country or one in close proximity, but both countries pay extremely low prices for supplies.
What might be the implications to the quality of the labor, the quality of the raw material, and the quality and cleanliness of the manufacturing facility? These are questions that are oftentimes overlooked in the development of the supply chain, but can come roaring forward at any moment in time and impact a company’s ability to deliver product. One example is lead paint and other impurities in children’s toys.
3. Climatic challenges
• Climate has many potential implications – a hurricane on the Gulf Coast, a Tsunami off the coast of Japan, a major supplier on the coast but below sea level, a supplier in close proximity to a nuclear power plant which just happens to be built on a fault line, a volcanic eruption in Iceland and on and on. What are your back-up plans? Most often the plan is, “We will react once the crisis happens.”
4. Single supplier
• Quite often we have multiple suppliers for each of our products. But how often do we look to see if they all source critical components for their products from a single supplier thereby negating the benefit of a multi-source strategy should that single supplier succumb to an economic issue, a climatic issue, political turmoil and so on. Once again, this issue is usually discovered after a problem occurs, causing supply chain disruptions and economic impact to many companies.
5. Poor vendor compliance
• Let’s take hazardous materials as an example. Not only must suppliers be verified, but also suppliers’ suppliers (and perhaps even the next level down).
All of the above issues can potentially lead to compliance issues. Remember certain quality standards set in one country cannot be mandated nor guaranteed in another country.
6. Lead times
• Perceived lead time vs. actual lead time. Say you locate your factory 50 miles across a country border from your key customer and figure it is a 3 to 4 hour drive to deliver your parts. An excellent idea – short lead time, reduced inventory carry, improved service!
Have you figured in import / export regulations, delay in border crossing, and the availability of customs clearance on weekends? Will your customer even receive product on a weekend? Is the border crossing safe? A major issue in many “high value regions” – how much loss might you incur?
7. Supplier Business Continuity planning
• Too often the supplier contingency plan verification consists of a cursory look at a binder and a check mark on a requirement check list.
Rarely are time and effort invested in validation that includes a deep-dive into the details and the grading of such critical plans based on a standard maturity model.
Knowing that people are key to crisis management and recovery, does the planning include the vendor human resources? How would a natural disaster, communicable disease or political unrest impact a critical supplier’s ability to deal with a crisis and protect the downstream supply chain?
• How safe are critical plant facilities and equipment and how well are they safeguarded in the event of a crisis? Resent history is full of examples of known high-likelihood risks (fires, annual flooding, earthquakes, labor force unrest) significantly impinging the ability of vendors and subcontractors to perform.
• Overall organizational preparedness is critical particularly in more fatalistic cultures that may not share the same level of urgency or the same risk and impact perception. Too often cross-cultural crisis communication is influenced by an entrenched “saving face” or dread of “losing face”. Without an objective messaging plan in place, many critical details are easily “lost in translation” particularly during the onset of a crisis. The ability to communicate effectively under pressure, coupled with the ability to filter inaccurate information can make all of the difference when making decisions regarding the ripple effect of a crisis at a distant supplier site.
These are all critical risk management issues that must be considered as you design your supply chain.
In today’s world, many of these are relegated to the “backseat” in favor of a potentially better looking income statement and balance sheet. Because many disasters can be “written off” or “that’s why we have insurance,” key risks may be ignored until there is a disaster. However, someone pays for that insurance, someone pays for that write-off, and someone pays for that lack of quality or toxic risk. Ask the people in West, Texas.
Review Parts I and II in this series:
Demand Planning – Part II of IV in Supply Chain Resiliency
Jun 27 2013 – Demand Planning – Part II of IV in Supply Chain Resiliency – By Robert Benny & Missan Eido – The supply chain is made up of a sequence of highly interrelated, serial and parallel dependent activities. Demand planni…
Supply Chain Resiliency – A series of short articles – Part I: Where to Look is a Critical Success Factor
Jun 19 2013 – Supply Chain Resiliency – A series of short articles By Robert Benny & Missan Eido From Jim Satterfield: As the President of Firestorm, I am pleased to introduce this Series Introduction and first article, …