The article “Supply Chains and Demand” in the September issue of CFO Magazine points out that
‘One aspect of supply-chain management that is likely to become a legacy of the recession is a much more careful assessment of the financial viability of suppliers and customers.’
Heck, if twenty-five US banks including Indy Mac, Washington Mutual and Silver State can fail in 2008 and the number of US bank failures in 2009 is 89 and counting, why can’t my suppliers or customers fail? It’s a sign of the times that you can’t count on the financial viability of any partner, large or small and in fact, size doesn’t really matter.
What does matter is how critical each partner is to your supply chain. A key tenet of risk management is to segment your markets and products into groups based on dimensions that are relevant to your business. For example, products can be segmented by their relative contribution to revenue and margin, their stage in the product lifecycle, and whether they are strategic for entering a certain market. Customers can be segmented based on their revenue contribution, or whether they represent a significant potential for sales growth or portfolio expansion. Degree of exposure is a key dimension for segmentation of suppliers. As the article points out Corning does this for their supply base: “The more we spend with a supplier the higher the potential risk, particularly if it’s a sole-source supplier,” says Mark Rogus, senior vice president and treasurer of Corning.
It would also be useful to look at what suppliers have relatively high correlations between the components they supply and your strategic products and/or customers. If you spend a relatively low amount with a given supplier, but that supplier can impact the delivery of your most strategic product or service level with your largest customer, they may represent a relatively high risk in your supply chain.
As the article points out, procurement has found that they need to turn to the finance group for credit analysis which is where the expertise resides. Product, customer and supplier segmentation is a logical first step in understanding what partners you need to assess first. Whether this additional assessment continues to be part of the procurement process going forward or if it gradually fades as the economy moves out of the recession, it’s important that the process stays focused on the partners that have the biggest potential impact on your business.
Agree?
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Tags: Supply chain risk management, Supply management
Posted in Supply chain risk management
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Very important isue raised here and this needs to be incorporated in the initial contract with the vendor so that visibility into the financial health of the vendor is obtained s as to safe guard againgst any air pockets in our supply chain or manufacturing output.
At the recent Industry Week Demand Management webcast, Karl Braitberg, Vice President, Customer Value Chain Management at Cisco spoke about customer segmentation and service programs. He spoke of the value of customer segmentation as a risk management principle along with supply side risk strategies. Yes this is something that everyone needs to understand to mitigate uncertainty.