Tag Archives: risk management

Sole Source Suppliers? Your Future Depends on Supplier Relationship Management

SRM maize blue

You’ve tied the knot; is it effective?

Today, procurement and supply chain managers focus more time and energy on managing sole source suppliers than I’ve ever seen in my 30+ years in the profession. Typically these suppliers provide a technological edge, are locked in by regulatory requirements or are the sole survivor of a massive industry consolidation. Many supply chain practitioners aren’t effectively managing these supplier relationships that are so critical to their business’ success. As a result of the mismanagement, the supplier exercises a strong influence on the business as a whole, has a tremendous amount of power in the business, maximizes revenue and profit and takes advantage of the fragmentation of procurement and supply chain managers across a global business. The key to survival is effective supplier relationship management; as Joe Payne, in his MyPurchasingCenter.com post last month says “the future of procurement is SRM.”

Many clients have asked me to develop development programs for their teams to better manage sole sources of supply. During my 23 year consulting career, I have recorded a commonality among the companies managing sole sources of supply, which I’ve listed below.

Characteristics of Ineffective Sole Source Supplier Management

  1. No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
  2. Fear of upsetting the supplier
  3. Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
  4. No defined process, defined leader or coordinated cross-functional approach
  5. Supplier holds the power in the business relationship and defines the value delivered to the customer
  6. Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
  7. Typically the relationship with the sole source has tension and is somewhat adversarial
  8. Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
  9. Focus on price rather than value extraction
  10. Develop tactical contracts with remedies for failure, rather than a principle-based agreement focusing on the relationship and formulas for success

While there is a great deal of challenge managing sole source suppliers, companies can go a long way to extend value delivery through strategic rather than tactical relationship management. It would take a tremendous cost and effort to strategically manage all suppliers; the more strategic a supplier is, the more of a company’s resource it will consume. Therefore, it’s critical that a company focus its efforts on the highly strategic suppliers.

To become effective with strategic supplier relationship management:

  • Renegotiate using the principles that will drive the relationship in the future. (My wife, @SourcingChick, uses this tip: contracts tend to contain penalties for non-compliance, while principles provide the framework for success. Maybe that’s why we’re still married after working together for so many years.) Some examples are:
    • Speed to market
    • Exclusivity
    • Innovation
    • Speed of response
    • Joint customer and supply chain integration
    • Principles around cost transparency, margins, and investments
  • Nominate a relationship leader and build a cross functional team that accommodates the technical, commercial and supply chain integration processes.
  • Create joint value targets and incentives for both sides.
  • Develop closer business integration.

With the amount of acquisitions and mergers, companies exiting from products and markets and the continuation of true globalization, supplier relationships will require close management and integration. Training and development programs have moved from functional training to cross-business training. I am hoping by sharing my thoughts on sole source management that companies will start to get a vision for the future and think about how to prepare their teams.

The Future is Now

Supply Chain Failure – Can it happen to you?

tricycle

What can go wrong?

In my career I have witnessed supply chain disasters that resulted from lack of knowledge or poor planning. You may be thinking that knowledge and planning are the cause of most failure, so you know this won’t happen in your company. Let’s look at one example to see if you may have some of these same conditions in your supply chain.

A few years ago I was working with a firm that made survival gear for boaters. They had a big concern because one of their competitors had made the move to global sourcing and they needed to find a low cost supplier to remain competitive. This client called me in when they had sourced their goods at a factory that they hadn’t seen, had no relationships and were in danger of missing the entire boating season due to poor specifications, communication, inferior product and several missed deliveries.

Failure 1: Offshoring makes it extremely difficult for firms to manage and monitor supply chains.

While it is often convenient to use a trading company as a sourcing agent, it has the potential to put your company at extreme risk. It is essential to conduct required due diligence. You can’t be 100% sure of who the real supplier is. While it is an expense, failure to visit to the factories, create personal relationships with the seller and set up third party monitoring of production, is a failure of best practice. It would be a catastrophic event to discover a subcontractor with unethical practices, child labor, environmental and other issues was named as a source of supply for your company. One of my clients in the metals business outsourced its Asia procurement to a third party (paper manufacturer); the result was a disaster. Not only did the company not understand the technical requirements, they had no vision of the buying company’s ethics and corporate social responsibility programs.

Failure 2: When sourcing globally, companies must build the same relationships and subscribe to the same level of research on the supplier as they do domestically.

Many companies are driven to global sourcing to achieve lower pricing, but cost pressure can lead to compromising quality, performance, TCO and ethics.

Failure 3: Maintain a focus on all aspects of the total cost of ownership.

Initial pricing may be higher, but sometimes the higher priced item provides higher efficiency, productivity and throughput, lower warranty claims and overall value increases. Overall, while we all work to achieve cost and value improvements, we should work to achieve best total cost sourcing rather that price sourcing.

These three examples are ways that things can go wrong. Total cost is not a novel concept, but it is rarely used because people don’t take the time to analyze what they buy and put the key metrics in place to show that they are sourcing best value!

Are you covered in these 3 areas?

Slavery in your Supply Chain-Do you know?

Last week I read a very interesting article in the New York Times that detailed how an investigation by the Associated Press prompted the emergency rescue of over 300 Slaves. The astonishing thing is that the article reported the “men from Burma were among hundreds of migrant workers who have been lured or tricked into leaving their countries and forced into catching fish for consumers around the world including the United States.” Much of the fish caught by the enslaved men was tracked by satellite and traced to some of America’s largest supermarkets and retailers.

Forced labor and slavery is big business. Of the 35 million people estimated by the Global Slavery Index to be enslaved worldwide, the majority are victims of exploitation in private sector activities, such as manufacturing, construction and agriculture. The illicit profit estimated by the International Labor Organization is $150 billion per year.

Many companies are adopting risk strategies, but I don’t believe that companies go far enough. When I speak to groups of supply chain professionals about risk management, I always ask how many of the audience members have a risk management strategy. It’s not surprising that all hands raise to affirm they have a risk strategy. The second question I ask is how many people manage the supply chain beyond the tier one or primary suppliers. Most of the hands go down because companies rarely manage the entire supply chain. From my experience working with hundreds of companies around the world, rarely can you find a map of the supply chain end-to-end.

News headlines are further evidence that companies need a strong handle on the supply chain. When toy companies have been accused of buying from suppliers that lack ethics and abuse employees, and garment retailers have suppliers whose factories collapsed killing hundreds of workers, the brand names who sell these products scramble to issue statements that they were unaware of the problems and promise to tighten their policies. Have they been successful? How do they know?

My advice is that every supply chain should be mapped and the complete supply chain should be audited. This is the advice I gave in 1998 in the book “Transform your Supply Chain; Releasing value in Business” and the advice remains sound in 2015. An excellent tool for audit is the Supplier Risk Index (SRI), an online resource developed by Ethisphere and the Institute for Supply Management® (ISM) for organizations to survey the practices among their suppliers and their supplier’s suppliers.

Of course, Supplier Visits are essential wherever your supplier is located. Learning to ask the right questions, meeting with the right people and being observant to identify their suppliers can help put the supply chain puzzle together.

Do you really know if slavery is part of your supply chain?

Will the Heinz and Kraft merger impact your supply chain?

 

The food industry has been consolidating for the last decade with a big impact on its supply chain. Traditionally, the supply chain has been a combination of small suppliers producing ingredients that are combined by the manufacturers and then sold to food service and retail distribution channels. In my opinion, consolidation, regulation, increased cost of doing business, demand for additional inspection, demand for longer payment terms, just in time production systems and drive for lower cost has driven many suppliers out of the business.

Consolidation has also caused issues for the industry leaders since there are fewer suppliers, reduction of capacity, increased risk and increased costs and fewer choices for key ingredients. Many of the key ingredients and specialty packaging solutions come from only one or two suppliers. As companies like Heinz and Kraft merge and focus on homogenizing specifications and the supply base, it is essential that attention remains on maintaining a strong supply chain that can deliver in the ever-increasing demands of the industry.

For the suppliers in the industry, it will be essential that they maintain a healthy bottom line, innovate new products, remain lean and align with strategic partners both up and down-stream in the supply chain. The ability to continuously improve, remove risk and compete will be an essential factor in the ability to survive in an age of massive industry consolidation.

No one can predict the future, but understanding the ever changing environment will be the key to survive and thrive.

Will your strategic supplier get “voted off the island?”

How do you manage risk?

A recently released Accenture study, “Don’t Play it Safe When it Comes to Supply Chain Risk Management,” shows the wide range of approaches companies take when it comes to managing their supply chain risk.

Unfortunately, only slightly more than one quarter of the companies surveyed are taking the most important tack, developing a “playbook” or plan that various parts of the organization can implement immediately when a crisis strikes.

It’s well and good to identify alternative suppliers that can step in when needed.  And it’s critical to monitor all of your suppliers (not just Tier 1) on an ongoing basis for troubling trends and potential risks.  Building in excess capacity in the event of high volatility is important, too.

But if you don’t have that plan or playbook everyone can follow, you risk having everyone react “one off” and potentially exacerbate the crisis.

On Wednesday, July 16, ISM will host its Risk Management Summit in New York City.  It’s an opportunity to learn how to identify and oversee critical risks, and learn the key measurements you need to effectively communicate and implement a risk strategy.  For more information, visit ISM Conferences for 2014.

 

Thoughts on the Chinese economy

The Chinese version of the ISM PMI® has ticked up from negative to positive territory, according to reports such as this one on Bloomberg.com.

A preliminary June Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, up from 49.4 in May. An index above 50 signifies expectations of growth, and Chinese leaders are giving themselves credit for stimulating the economy without resorting to drastic measures.

A survey of analysts by Reuters came to a similar conclusion about the growth of the Chinese economy. More reporting of a stronger Chinese economy comes from the South China Morning Post.

We do a significant amount of work in China and the business environment there is unique, but it has matured since the days when U.S. automakers, for instance, were almost demanding that suppliers source from there. Large Chinese companies are not just focused on exports, but meeting growing domestic demand. They are adapting more sophisticated sourcing strategies of their own, and even investing in manufacturing plants in the United States, as described in this article in The Detroit News.

The strength of China’s economy and the rapid change in sophisticated sourcing is evident in  increasing  demand for development programs, certification programs and alignment with key universities in China.

The maturation of Chinese companies does tend to reduce their cost-competitiveness, but it also introduces elements of stability that mitigate some risks from sourcing at a great distance. Economic indicators that show slow, steady growth are also good signs of stability.

 

Source Responsibly

Consumer pressure for sustainability has become so powerful that even a company that is dedicated to celebration and partying – Bacardi –  is taking a socially responsible position on sourcing. It has released a very detailed list of actions it’s taking.

These actions range from sustainable packaging to recycling waste to building a green-certified distillery in England. Bacardi even exclaims its goal to obtain 40% of the sugarcane-derived products used to make its rum from certified, sustainable sources by 2017 – and 100% by 2022.

Bacardi is using social media to promote its branded initiative, artfully called “Good Spirited.” So it obviously believes the initiative has marketing value. That tells us two things:  One. Sustainable sourcing is generally accepted as good for the company. Two. It’s still considered something that’s unique enough to set Bacardi apart.

The question is, how long until sustainable practices are so widely adopted and universally expected that touting them isn’t even worth it. What do you think?

 

Executives worry about supply chain risks

Supply chain disruptions were noted as the biggest risk to overseas business operations, according to a recent survey of high level executives conducted for Chubb Insurance.
Nineteen percent of the respondents listed supply disruptions as the number one risk of relying on overseas business partners. Other risks included data breaches, political instability and natural disasters.
This data wouldn’t really be newsworthy, but the Chubb survey also found that only 56% of the responding companies have a business continuity plan that addresses overseas risks, and 22% of those companies have never tested it.
Even considering the potential bias of a risk survey from an insurance company, there is clearly a gap there.
If you think your company may not be prepared for managing supply disruptions, a good first step is mapping your supply chains deeper than the first tier or two. Too often, real surprises come from problems at suppliers we didn’t even know we had in the chain. Think about the pigment factory closed by a tsunami in Japan, or the high temperature resins that disappeared when a plant in Germany burned.
If you know your chain, you can run simulations to assess the impacts of potential events.  The best practice is a detailed survey and a predictive model indicating which suppliers have the highest probability and impact.  I think the highest risk suppliers are sole source suppliers with a single location and a unique technology  Your mitigation plans should take into account both the likelihood of each event and the profit and cost impact it would create.

New index will determine supplier risk

Concerned your suppliers might not be prepared if a disaster strikes? Or that they may be doing something that could be considered unethical? This morning at ISM 2014  a new “Supplier Risk Index” was announced to enable companies to survey the risk, ethics and sustainability practices among their suppliers and their supplier’s suppliers.

The new index will help companies identify potential supply disruptions — including disasters, and ethics, compliance and sustainability issues — to keep their businesses running and protect their brands. The data can be used to address any weaknesses and implement risk mitigation strategies before anything happens.

ISM and The Ethisphere Institute partnered to develop the new index and will demo it on Wednesday, May 28, at 1 p.m. ET on Readytalk.com.

Shock proofed supply chain?

Most Americans probably couldn’t locate Crimea without the help of Google Earth. (It’s the peninsula that juts south from the northern coast of the Black Sea.) Nevertheless, the actions of the Russian army in and around Crimea are sending shock waves through some key commodity markets, including oil. Here’s the Washington Post coverage of the story.

Have you felt any effects from the spikes in market prices? Even if you have not, this is another reminder that your supply chains likely have connections around the world that may not be obvious from your first tier suppliers. It’s good practice to map your supply chains and analyze scenarios for disruptions that could happen at any moment.

While the chances of any individual incident might be very small, there are so many potential disruptions that it is quite likely something will go wrong sometime. Smart supply managers build risk management strategies into their planning to accommodate them.