Better supply chain risk management would have prevented a shutdown of Chrysler LLC factories this week caused by a dispute with Plastech Engineered Products, Inc.
It is unfortunate that many companies assess the vulnerability and risk in their supply chain after a catastrophic event occurs. The best practice in supply chain management is to have a detailed risk management plan, which would have anticipated scenarios such as a bankrupt supplier and set up contingency procedures.
For example, a set of duplicate tooling for critical plastic components might have been cheap insurance for Chrysler. It’s easy to see that in retrospect, but it’s also possible in many cases to assess risks in time to mitigate them. Tools are available to identify potential trouble spots by analyzing key supply chain risk factors. Those predictive models can spot troubled suppliers or other potential problems that can disrupt supplies.
Chrysler’s dilemma also points out the dangers when big companies use too much leverage to try to force down prices from their suppliers. It is unfortunate, but as the economy continues to worsen and prices for basic commodities soar, suppliers that have been leveraged by their customers are bound to fail.
Here are some early warning signals of suppliers who are in trouble.
• Constant price increases, early payment, accelerated payment terms or direct financing
• Consistently using your technical support
• Failure to support sales
• Failure to meet on time in full deliveries
• Requests for pre-payment
• Lack of investment
• Failure to appropriately cut costs during economic downturns
• Delinquent paying taxes
• Deteriorating accounts receivable and payable
• Employment of business turnaround specialists
• Introduction of many consultants – especially business turnaround specialists
• Lack of maintenance
• Negative variances from projections
• Payments on insider debt
• Use of third parties and factoring companies
• Loss of business or market share
• Recent rapid growth in sales volume
• Lack of focus by management or response to requests
Even before you spot those warning signs, here’s a few techniques for managing supplier relations and avoiding troubled suppliers.
• Conduct proper due diligence on the front end
• Periodically audit suppliers
• Create a program to effectively select and manage the supply base
• Conduct internal training for purchasing agents, accounts payable, quality control and plant managers so they can recognize potentially troubled suppliers
• Create a proactive Supply Chain Risk Management strategy