Supply-Chain Risk Planning: What’s the Best Approach?
Heroic efforts around COVID-19 highlight the over-reliance on shoot-from-the hip strategies.
Supply chain risk planning is getting a lot of attention these days. In fact, I’ve never seen mainstream media take on this subject to the extent they have. This focus is both good and bad. The bad is that we are in a pandemic and the media’s attention is a result of supply chains not adequately supporting our pressing medical-related needs, at least to date. In fact, if it hadn’t been for heroic efforts of supplier and OEM personnel, the world’s efforts to address COVID-19 would have been a lot weaker than they have been.
In the old days, we use to call these individuals firefighters. They are the people who were called upon to fix problems as they came up. While there were—and maybe still are—people in most organizations that became very good at fighting fires (reacting to problems), a shoot-from-the-hip strategy is generally not the best approach to use in problem-solving.
I once developed and managed what was considered a world-class supplier development function. Two factors were the primary basis for the success of that team. First, there was an overall strategy and process framework; i.e., a focus on true lead-time reduction. The second was that people were hired with the education and background that aligned them with that overall strategy. In working with suppliers, we didn’t shoot from the hip. Rather, we applied—and trained supplier personnel in—a proven process for increasing competitiveness. I need to give kudos to the people in this group. They were really quite exceptional—the best I ever managed.
One of the infrastructure tasks we took on was to put together a comprehensive sourcing-related risk assessment. We evaluated supply chain risk in terms of overall supply chain strategy; supplier operational support; the probability of acts of God; and financial impact.
The risks identified and quantified in our analysis were far too detailed to be covered in a single article. This article will focus on outlining what we considered the high-impact risks associated with OEM supply management strategies. Future articles will cover the other three areas of our focus.
Corporations put together strategic plans that align functional area metrics with strategic goals. The current supply chain crisis has led many large corporations to consider re-evaluating their purchasing strategy, which today is measured primarily in year-to-year piece price. In my mind, there are three primary strategies that need to be reviewed—the source selection process; the management of supplier relationships; and whether supply management is considered a tactical or strategy function within an organization.
Source Selection Process
1. Sole-sourcing with overseas suppliers
There are three primary sourcing strategies, from my point of view. The most prevalent today is sourcing all requirements for a specific part and/or assembly with a single supplier. There are various reasons why companies might apply this strategy, including:
The supplier is the source not only of the needed critical parts and/or components but also owns the intellectual property of their design and/or the processes used in their manufacture.
When tooling is required, having more than one supplier results in a higher tooling investment.
The resulting overall higher volumes can be used as a carrot in price negotiations.
Sources are selected primarily based on lowest piece-price, which is typically offered by a single supplier.
Another name for sole-sourcing is “putting all of your eggs in one basket.” This is a high-risk strategy that is generally avoided in things like investing. It also represents the highest risk sourcing strategy—particularly with long and complex supply chains—needed to support the fulfillment of parts from overseas suppliers. Companies with these supply chains typically spend significant money on logistics, warehousing and material handling of safety stock to mediate sourcing risks. For the most part—at least in my opinion—such expenditures are Band-Aids needed to support poor sourcing decisions.
And there is (at least) one shortfall of these remedies (as we’re seeing today). Specifically, no amount of logistics, warehousing or material handling will suffice if a supplier is unable to produce the needed parts when they are needed. I once had an employee put a sign up on my department’s bulletin board that said:
If you can’t help me when I need you, I don’t need you.
That may seem a bit harsh, but it is a reality in the purchasing arena.
Another point that has become especially obvious during our current crisis is that it is insane to source critical parts with suppliers where long and complex supply chains are needed, again, unless there is no other choice.
Our country’s military understands this and addresses the issue with a policy called DPAR, which essentially requires that all critical parts/assemblies purchased for use in military equipment be sourced with domestic suppliers. This is primarily to protect our country’s intellectual property, but the strategy also provides for other benefits including for responsive order fulfillment.
2. Sole-sourcing with domestic suppliers
The second most applied sourcing strategy is to sole-source from suppliers local to customer manufacturing site(s) and/or product markets. The same risks associated with overseas sole-sourcing are also present here. In this scenario, the domestic supplier needs to be at least ballpark-competitive price-wise, with any additional material cost regarded as a type of schedule-support insurance by the customer. Domestic sourcing with agile suppliers can also lead to additional profit when demand is greater than what was forecast.
As mentioned above, the same types of risks found in sourcing with overseas suppliers are also present in domestic sole-sourcing, although to a much smaller extent. For instance, another basis of DPAR is that the military understands that when suppliers run into production snags, they can more easily and effectively be addressed by domestic sources. Why? Because their proximity facilitates the supplier-customer collaboration needed to resolve them. A good example of how this can work was described in the IW column “Crash Course in COVID Relief.”
3. Multiple sources
Sourcing a part and/or assembly with two or more sources—when possible—significantly reduces supplier-related risks. This arrangement typically takes the form of one local supplier—which provides order fulfillment assurance—and one from overseas, which helps reduce overall material cost.
Of course—as stated above—this strategy can require additional investment when tooling is required. It can also require more oversight from the supply management function. But these additional costs are usually more than covered when risks that are associated with overseas sole sourcing are reduced or eliminated. This approach is discussed in detail in the article “Plan B vs. Contingency Plan: Which Supply Chain Fallback Is Best?”
Personally, I believe that a dual-supplier sourcing strategy represents a best case middle-ground approach and should be considered, especially when demand forecasts are open to significant error.
The Management of Supplier Relationships—Positional vs. Collaborative
Customers that take a positional—win-lose—stance in interactions with suppliers introduce more risk than working with them in a collaborative—win-win—manner. Why? Under a win-lose relationship, everyone wants to win, and the only way to do so it at the expense of the other party.
I’ve written extensively on this subject, and for that reason won’t elaborate much on this issue here.
In general, there are two main rules for managing suppliers;
Negotiating in a positional manner should only be done—and not all of the time—with commodity suppliers.
If it would take you a lot of time and money to resource from a supplier, manage them collaboratively.
Supply Management Role—Strategic vs. Tactical
Many companies treat supply management as a tactical function. What do I mean by this? Performance goals are primarily set based on piece-price reduction. And the annual amount of piece-price reduction usually comes down from a company’s financial function.
This almost sole focus restrains supply management in a significant way, since it doesn’t acknowledge that the function can impact costs and revenues outside of that box. In other words, time spend on cost reduction outside of piece-price will reduce resources available to hit their established goals and, even if that work is successful, will likely not be attributed to supply management.
What needs to be understood is that the positive impact that supply management can have on a company’s financials far exceeds piece-price reductions. It is up to the supply management function to give visibility to, set goals for and establish strategies and processes to achieve these results. The function cannot do that, however, without being a contributing member to a company’s strategic planning team. More detailed discussion on this topic can be found here.