08 February 2012

Viewpoint : Guest Columnists

Supply chain risks: act now

Published:: 01 June 2010
Article Type:: Viewpoint

Brian J O’Connor is an international consultant working in extended supply chains in America and China.

This economic crisis exposes vulnerable outsourcing and extended supply chains. What can you do about it? Today shipping lines face reduced business, higher fuel costs and terrorists. Their solution is to mothball ships, for example, at Falmouth, to slow down to save fuel and to sail around the Cape to avoid Somali attacks. More than ever companies worldwide need to ensure their products/services are paid for so that they arrive on time and to specified quality. It is my contention that today's crisis demands new and vigorous action.

When I analyse the supply chains of multi-nationals it is clear that companies in the same chains are treated differently. Some are squeezed others are supported. Why? And what does this mean for you? Suppliers that are squeezed see prices forced down, payment terms extended to 90 days, discounts of three to five per cent taken for so-called prompt payment at 90 days, and delivery and lead times reduced and flexibility increased.

Where suppliers are supported, suppliers who find it difficult or impossible to get credit from their banks receive help from customers who: pay early, give loans, use their leverage to help suppliers get loans, and advise on how to eliminate non-value adding to reduce costs and lead times. Most important suppliers are encouraged to make change themselves.

You can learn from others including shipping lines. If a supplier provides a product/service which can be obtained from competitors then the customer can squeeze as much as he likes. His risk is minimal. If the supplier refuses to supply or goes out of business there are others available at short notice.

Suppliers can be global. If a supplier's product is strategic, bespoke or unique it is unlikely that another supplier will be able to help. It pays to support these suppliers. Locate these suppliers as close as possible to you.

Risks to consider: foreign exchange; commodity prices; climate change; fire; transport; swine flu; terrorists, pirates, drug barons, kidnappers; economic crime - fraud; loss of key people; intellectual property infringements; and government activities such as tariffs, Buy American, Medicare and National Insurance increases. It is essential to assess frequently whether risk is up or down, by how much and to take action.

To assess your risks see these questions:

1 which suppliers are your major risk?
2 where are their weaknesses and the causes of failure?
3 which suppliers are likely to fail in 3 months and at what cost to you?
4 which suppliers are the lowest risk and the best opportunity to increase sales?
5 which suppliers should you support, paying up front, early and facilitating and making loans?
6 which suppliers are likely to fail with the least impact on your business?

Ask similar questions for your customers. Probe daily. To communicate your risks, firstly, display your results on a chart with risk and cost axes. With four quadrants the top right quadrant, high risk/high cost companies, requires urgent action. The bottom left quadrant, low risk/low cost companies, can be left for later. Secondly, with digital information flow performance is visible up and down the chain in real time. Everyone is aware wherever they are (email and mobile). Some companies use cameras to monitor the performance of machines and inventories.

To reduce risk, I make no apology for recommendations on familiar principles. Strengthen partnerships - co-maker and co-designer. Customer and supplier are replaced by co-maker and co-designer. This motivates people to change their approach to quality, service and productivity. All parties co-operate upstream and downstream. A third tier supplier can be helped by a second.

Strong companies lend their specialists in what is called value networking. Everyone concentrates on value adding and elimination of non-value adding work. Costs are reduced and value to customers increased at the same time - a potent result. This includes redesign to reduce exposure and vulnerability to materials, bottleneck machines and key people.

Financially strong companies offer loans and wield influence with banks to obtain loans.

Other actions include:

Relocate in stable countries - this crisis exacerbates your risks. Review the location of your suppliers.
Relocate locally - extended supply chains are risky. Bring suppliers to your area. A major benefit is that you create jobs locally.
Bring the product/service back in house -the strategic, bespoke, unique product/service can be brought in house if you have finance, machines (mothballed?) and skills.
Hold stock at the customers' premises - this could be consignment stock paid for only when the customer starts to use it.
Carry spare capacity - there is an argument to carry spare capacity on vulnerable operations. In a crisis the need is stronger.
Eliminate all non-value adding operations -non-value adding can be 90 per cent. You cannot survive this level of waste.
Design suppliers out of your supply chains -reduction in complexity equals risk reduction.
Increase the number of suppliers - increase can be justified. Approve suppliers who can react at short notice.
Increase risk management - devote some of your management time to risk.
Digital information flow - use technology to be aware of failures in real time.
Disaster recovery plan - plan that precious time is not lost when people panic.

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