Supply Chain Risk – Your Supplier’s Supplier
Earning a place at the table
By John P. Campi, Firestorm Expert Council Member
As Chief Procurement Officer, one has the opportunity to build the credibility and the impact of the office to whatever level one chooses to attain. With the expansion of procurement into a global activity and the need to drive savings through the most cost effective sourcing activity, the procurement function has become one of the most influential areas for bottom line impact. Unfortunately, many procurement professionals have been reluctant to take the bold leadership responsibility that would clearly differentiate the position and demonstrate its potential value to the strategic direction of the firm.
What I am suggesting is a move into bold leadership by directing the procurement organization to take broader responsibility and engagement through a more aggressive interaction on the topics that have direct bearing on the execution of strategic sourcing. That starts with product development, moves through the quality assurance and production organizations and continually involves interaction with the sales and marketing organizations to insure clarity of the business direction and the ability to influence decisions that may add greater value by the inclusion of the procurement organization.
Today’s World Class Procurement Leaders are individuals that demonstrate broad based business acumen and a clear vision of the future of the company and their role within the organization. While this procurement leadership is a fairly new development, having come into its own only in the past decade or two, there is little doubt that the speed with which this change has been taking place is accelerating. The drive for low cost has had the unintended consequence of creating supply networks that are fraught with risk. The global sourcing phenomenon has been executed, for the most part, by procurement organizations operating with obsolete processes and techniques.
Specifically, buyers have been making sourcing decisions as they always have viewing the supplier selected as the only element within the “supply chain” that needs to be risk assessed. The traditionalists still only concern themselves with the financial viability of the supplier without concern for the suppliers supply chain or how many levels exist within the network. When companies placed purchase orders from the supplier down the street, it wasn’t too difficult to ascertain the viability of the network – it was only one or two levels deep and all located domestically. Today’s supply networks are global and multi-level,adding risk in quantum leaps. One could argue that the design and creation of the supply network, and your ability to monitor all levels may be the difference in your ability to sustain your business.
Your Supplier’s Supplier
According to a recent national survey, supplier failure and supplier’s supplier failure is the leading cause for business disruption. While most organizations contend that the supply chain is strategic to the ongoing success of the company, few, if any, have visibility into the network that supports their supply needs. Furthermore, we have found confusion and illusions within organizations regarding the risks that are inherent within today’s complex supply networks. Today’s perception of the risks we are running, do not match the experience of most companies. Additionally, training programs in risk identification and how to mitigate those risks simply are non-existent.
Examples of the risks that companies are confronting could not have been more plainly demonstrated than during the Japan earthquake and resultant tsunami in 2011. Major disruptions impacted multiple industries from electronics to automotive due to decisions made by buyers without who knowingly or unknowingly single sourced product in the most active earthquake zone in the world. Most procurement organizations have buyers making decisions driving cost savings without regard to the potential risks being assumed. A manufacturer of automotive paint made the decision to single source a critical additive to a single supplier in a specific facility.
Under normal conditions it can take as much as two years to have an automotive OEM agree to a new supplier of ingredients within the paint formulation. The single sourcing decision, while enabling cost savings by leveraging the agreement, takes on continuity of supply risks by having no other qualified supplier. A national retailer contracted with an Asian based manufacturer for the production of ceiling fans which, over time, resulted in a dominant position in the market. When the supplier had a devastating fire, there were no back up plans or alternatives to insure continuity of supply to a demanding public.
A great deal of work must be done to start to evaluate risk scenarios and develop the metrics and tools that will be necessary to appropriately mitigate supply network risk and assure continuity of supply. I will be commenting on this topic in upcoming blogs.
About John Campi: John P. Campi is the founder and Managing Partner for Genesis Management, LLC, an organization specializing in supply chain and cost management initiatives. Previously, he served as Executive Vice President and Chief Procurement Officer of Global Sourcing for Chrysler LLC where he was responsible for all worldwide purchasing and supplier quality activities.
Mr. Campi has extensive experience in the field of cost management and is recognized as a founder of the strategic cost-management discipline known as Activity-Based Cost Management. Before joining Chrysler, he served as the Senior Vice President of Sourcing and Vendor Management for The Home Depot. Read his full Bio Here