A couple of weeks ago, I was honoured to speak at a regional conference for PMAC (Purchasing Managers Association of Canada) about supply chain risk management.  At the end of my session, one of the attendees asked about one of the risk mitigation approaches I had suggested;  developing alternate sources.    The question went something like this;  How come you are proposing developing alternate sources when companies are trending towards supplier consolidation?  Actually, a very good question and one which points to one of the many dichotomies supply chain professionals deal with on a daily basis.  While I answered the question off the top of my head that day, I’ve been thinking about the question since and think it deserves a more complete response.

The answer, like many for questions in life is:  it depends. 

Just to go on the record, I fully support the idea of supplier rationalization if it is done with the idea of improving the relationship with a smaller number of suppliers.  The reason I put conditions on my support for this practice is because I have seen far too many cases where companies eliminate a large number of their supply base then continue with business as usual with the remaining suppliers.  No improvement in communication, no sense of partnership, no added value.  

On the other hand, companies that truly understand supplier rationalization understand that by reducing your supply base, you have the opportunity to improve communication and partnership with the remaining suppliers through more detailed forecasts, sharing of product plans and resolution of financial issues. The supplier, because they are getting a much larger part of your business, could share cost issues (and savings!), capacity information, supplier concerns and other key information that gives your company far better visibility into potential risks.

Which brings me to the dichotomy between supplier rationalization and risk management (which really isn’t a dichotomy at all…) If you have a component that is key to a product (if you couldn’t get this component you would not be able to make your product(s)).  If that product is key to your business, you need to identify and evaluate the risk that this supplier won’t be able to supply your goods.  If you truly have a partnership with your supplier, this risk assessment ought to be pretty easy to do because the necessary communication has been happening.  

But what if you have been reducing suppliers but not putting effort towards improving communication?  In my opinion, you are in a much poorer position for evaluating risk and as such you should absolutely work towards either improving the partnership with that particular supplier or developing other sources.  Depending on the strategic importance of this component, you may wish to develop an alternative source regardless. No level of partnership can provide visibility to an earthquake, hurricane or fire for example.  Despite the strong partnership, that supplier would still not be able to produce.

Remember, the need for a mitigation strategy depends on the risk and the impact of that risk.  You need to do the risk assessment for those suppliers that will have a significant impact on your business.  In today’s environment with the efforts towards supplier consolidation, you have much fewer suppliers to assess. On the other hand,  if any one of those suppliers fail, the impact on your business will be much higher. 

What is your approach to supplier rationalization?  How is this impacting risk management in your company?

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Tags: Collaboration, Supply chain risk management, Supply management
Posted in Supply chain collaboration, Supply chain management, Supply chain risk management
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