Chrysler’s production hiccup this week is a great lesson in how and why. How NOT to treat a strategic supplier and why risk management is a worthwhile investment. They are both related, because let’s face it, if you leverage your suppliers for cost reductions to the point of bankruptcy, you’d darn well better be watching them verrrrry carefully for signs of distress, and be prepared when you leverage them right into bankruptcy court.
Do we really think that Toyota or Honda would let a critical supplier slip into bankruptcy without sending in a few troops to help sort things out? Not that they would be inclined to push a supplier into that position in the first place, but if the price of petroleum is creating a crisis with a supplier, either one of them would be working with their supplier to find solutions.
Supply chains are only as strong as their weakest links – that’s an easy truth. Finding where the weak links are and taking steps to mitigate risks before they turn into losses – that’s harder. You can’t plan during a crisis, you can only plan ahead of a crisis.
Here are some tips that I have presented and published before, but seem particularly relevant today.
One way to start is by creating a two dimensional grid. Across the top, identify the “disruptors”:
- Disasters – natural or manmade
- Political instability
- Economic or Business changes
Working down, identify each link in your supply chain and all critical categories of supplies. Consider indirect spending categories as well as tracing sources for what your company might manufacture or distribute. A few examples to start a list:
- Outsourced components
- Raw materials – for your company and its suppliers
- Energy or fuel
- Transportation and logistics
- IT and communication
To really benefit from this kind of analysis you will need a comprehensive understanding of the supply chain for all critical ingredients and packaging materials your company requires. This means tracing your suppliers’ raw materials to their source with the assistance of your purchasing organization.
If your list is comprehensive and your information good you can simply consider each box in the grid to highlight your most vulnerable links. Using the grid systematically might unearth weaknesses in unexpected areas, as well.
Develop a Supply Chain Risk Management Plan
The best way to anticipate disruptions is to create a cross- functional team comprised of purchasing, manufacturing, research and development, marketing and quality personnel to create options for dealing with the vulnerabilities. If you realize that alternative materials or designs might have to be put in place, a testing program will likely be required to ensure that the integrity of the final product is not compromised. This team will have to buy the alternate supply sources and specifications you’ve designed.
This emergency action plan includes the following:
- Comprehensive documentation of the supply market including potential suppliers, their capacities and their capacity utilization
- An analysis of the supply chain down to the basic raw materials to understand vulnerabilities
- Critical review of specifications to understand how changes may be incorporated
- A detailed implementation plan
Interestingly, the thought process associated with building an emergency action plan may have some serendipitous beneficial consequences. By reviewing supplier relationships, you will gain in-depth knowledge of these companies, their capabilities and their relationship with their own suppliers. You will also acquire a more complete understanding of your specifications and how you can achieve the desired finished product.