Archive for the ‘Supply chain collaboration’ Category

With the rise of the BRIC countries – Brazil, Russia, India, China – we hear so much about manufacturing outsourcing and off-shoring. Of course with wage increases in these countries, ever relatively cheaper manufacturing countries such as Vietnam are being sought. Even in industries such as automotive, where outsourcing is less prevalent, the portion of the components used to assemble a car that are bought rather than produced by the OEM has continued to increase, in some cases representing as much as 75%. The pharmaceutical industry has an ever more complex supply network in which they may buy one active pharmaceutical ingredient from a supplier, which they then package and sell, and sell another active pharmaceutical ingredient to the supplier, which in turn packages and sells the 2nd pharmaceutical ingredient. Of course some of the greatest degree of manufacturing outsourcing occurs in semiconductor and high-tech, where, in many cases, the OEM does not manufacture any of the finished products. The same is true of apparel.

The key point I want to emphasize is that we are all aware that over the past 20 years the brand owner in the western world is doing less and less of the manufacturing, whether or not they are completely outsourcing manufacturing or buying more and more of the value of the competed item from suppliers. What I find intriguing, especially in the case where a brand owner has either sold off its manufacturing to a third party or started a subsidiary, is that the relationship that exists between the buyer and supplier is exactly that. In other words, it is driven by a procurement mentality that emphasizes cost rather than supply chain flexibility. This should not be a surprise since outsourcing is itself driven by the need to reduce assets on the balance sheet in order to reduce financial risk in the long term and improve financial performance in the short term. Admittedly, there has been a maturing of the approach to outsourcing in that many companies will now assess the total landed cost of supply, not just the manufacturing cost. 

But it is the relationship between the OEM and the supplier/contract manufacturer that I want to address in this blog. I would like to see this progress to a more mature relationship in which risks and rewards are shared. In other words, to a collaborative relationship.

Let’s investigate this loaded term “collaborate”.  According to the Merriam Webster online dictionary, it is defined as follows:

col•lab•o•rate
\kə-ˈla-bə-ˌrāt\ intransitive verb
col•lab•o•rat•ed  col•lab•o•rat•ing

Definition of COLLABORATE
1: to work jointly with others or together especially in an intellectual endeavor
2: to cooperate with or willingly assist an enemy of one’s country and especially an occupying force
3: to cooperate with an agency or instrumentality with which one is not immediately connected

In my experience most companies follow the 2nd definition in their approach to collaboration with suppliers, largely because it is driven by a narrow procurement mentality, not from an end-to-end supply chain value and effectiveness perspective. Therefore the relationship is mostly distrustful and adversarial. In some cases the discussions move from the 2nd definition to the 1st and get bogged down in endless meetings with little tangible progress. In some cases progress is made to the 3rd definition, which is what I mean by collaboration.

In a blog titled “Time to Broaden the Knot on your Bow Tie?” Lora Cecere discusses her experience with collaboration over many years of working in industry or as a supply chain analyst. Lora writes:

My goal of this blog: stop the madness. Reset expectations. Stop fooling yourself. What most people call collaboration is really data sharing. Collaboration can only really happen when you have a lasting win-win value proposition; and in this changing world of power structures, constraints, and demand volatility, this is harder than ever.

According to BusinessDictionary.com Lora is spot on in her statement (my emphasis).

Collaboration
1. General: Cooperative arrangement in which two or more parties (which may or may not have any previous relationship) work jointly towards a common goal.
2. Knowledge management (KM): Effective method of transferring ‘know how’ among individuals, therefore critical to creating and sustaining a competitive advantage. Collaboration is a key tenet of KM.
3. Negotiations: Conflict resolution strategy that uses both assertiveness and cooperation to seek solutions advantageous to all parties. It succeeds usually where the participants’ goals are compatible, and the interaction among them is important in attaining those goals.

Let’s not be naïve though. The Japanese Keiretsu has its legitimate detractors, as does the South Korean Chaebol. Clearly there needs to be some level of tension between the brand owner and contract manufacturer, otherwise there would be no point in manufacturing outsourcing.  But let us take the best part of the Keiretsu concept, which is about true collaboration between partners, and discard the less attractive financial aspects of cross holdings, which meant that poor supplier performance was often tolerated beyond what was reasonable.

From a technology perspective, what caught my attention initially was Lora’s statement that “What most people call collaboration is really data sharing.”  EDI was a fantastic innovation in its time, but it is time to invest in the future based upon internet technologies. We have so often confused raw data with information. EDI only supplies raw data. How many phone calls and emails are required to supplement the EDI messages so that the buyer or seller has a full picture? Lead times as malleable. Due dates are malleable. A lot of supply chain data is malleable, but if all we receive is a binary/digital signal from a trading partner, we can only respond in a binary manner – yes or no.

Lora goes on to state that

Broaden your Bowtie: Conceptually, this approach has been around for a long time, but it has been difficult to execute. Just too time consuming to connect trading partner warehouse managers, traffic managers, customer service personnel, etc.  Not anymore. Use social technologies like Lithium and Jive as a core on partner extranets to connect people to people.  Complete with pictures, interests, microblogging, instant messaging, and fan pages.  Who says that supply chain cannot be more social?

There is no doubt that social media is catching on within companies to facilitate all manners of collaboration within the company. Why not leverage social media technology to transform data into information, adding all the nuances and subtleties of meaning and intent? But if you are using social media to add the additional content, why not exchange the raw data using social media too?

While using social media for supply chain collaboration is possible, it still does not go far enough for me. It most certainly helps to elevate data to information. But why not provide key suppliers, especially contract manufacturers, and customers limited access to your planning systems so they can participate directly in the decision process? You will have then elevated raw data exchange (EDI and transaction systems) to information exchange (social media) to true decision collaboration. This is possible today. (Don’t look to your ERP vendor for this technology. Their focus is inside out, not outside in.) Leave the final decision to the EDI messages and transaction systems, but the communication and collaboration required to reach a decision should be carried using internet technology. Decisions cycles are shortened dramatically in the examples where I have seen direct participation of key suppliers in the decision process. This is not nirvana. It is possible today. And a few innovative companies are taking advantage of this capability.

What do you think? Am I smoking an illegal substance? Do you have collaboration stories to share? What were the barriers? How did you overcome these?

This is a follow-up to my post from a few weeks ago: Expediting versus Planning.  I received many comments and recommendations on this subject as to whether much of the expediting that occurs is in fact related to planning deficiencies.   After reading and reflecting on the comments I received, it seems to me that the premise that effective planning by itself will reduce the need to expedite is not necessarily true.  Obviously, effective planning is critical to reduce expediting.  Without a good plan, then what do we execute?  However, no matter how good plan is, it will always change.  Forecasts by definition are not accurate.  As we all know, changes and disruptions can occur in an almost infinite number of ways throughout the supply chain.  The best plan will always be out of date almost immediately after it is published.  (Just to be clear, when I say plan, I am referring to the MRP plan.)

Given the assumption that a plan is crucial, together with the realization that the plan will not be accurate, we are led to the conclusion that we need a stable plan, but be able to adjust the plan as and when needed. We need to be able to adjust the plan only when significant enough factors warrant a change to the plan, and with enough lead time and stakeholder buy-in to execute properly.  To restate, I believe that the following are important:

1. Plan Accuracy and Stability – The MRP plan needs to be stable enough to enable effective execution but we need to be able to detect exceptions that are significant enough to warrant a change
2. Responding to Change – The capability to effectively respond to required changes needs to be in place

How do we effectively accomplish the above?

Plan Accuracy and Stability

• First, the plan needs to start with an effective Sales and Operations (S&OP) process.  The more robust the S&OP process, the better that the high level plan will be.   
• We need to be able to detect or sense the need for changes, and once needed changes are detected, we need to be able to discern which are significant enough to warrant a change to the plan. 
• We also need to be able to prioritize these since there may be more than we can deal with. 

The key is that potential problems such as material shortages and late customer orders need to be detected for the future.  Obviously, once late orders or shortages have occurred, they are easy to detect (maybe even by way of angry calls from customers or buyers getting urgent messages from production regarding shortages.)

Referencing a recent blog post by Kerry Zuber, “Driving performance improvement through exception management“, Kerry states that in some organizations, there can be as many as 30,000 action messages generated by an MRP regeneration.  This exemplifies the complexity of the MRP plan and sheer volumne of exceptions in many organizations.  The organization cannot work all of these recommended actions, but which ones are the right ones to work?  Which ones signal that something in the higher level plan needs to be adjusted?  A second level, automated process needs to be in place in this type of environment to prioritize actions and also alert the responsible parties. 

The capability is required to detect what future demand will be late due to the mis-alignment of supply schedules,  issues with capacity in the supply chain and other issues.  If the future state/impact cannot be detected, then adjustments or contingencies cannot be put in place to avoid or mitigate them.  And as mentioned, we also need to be able to determine which of the detected changes require action and by who.

Responding To Change

Once changes are detected, we need a process to effectively implement these changes. This involves two key process and system capabilities:  simulation and collaboration.

We need to be able to simulate what-if scenarios to determine how best to deal with the change.  For example, it is difficult to calculate what the impact of a supplier changing commitments on a PO schedule will be in many environments without being able to simulate what that change in the commitment does to the overall plan.  In developing a response to the change, we need to be able to simulate multiple action alternatives and assess how well they will solve the problem and also whether they are achievable.

These simulations cannot be done in a silo.  Any significant change needs to be collaborated on with the extended supply chain.  Collaboration is certainly required with other internal organizations and potentially with affected external suppliers.

I realize that the above is very high level and probably over simplified, but I believe the general concepts are necessary in a complex manufacturing environment to optimize planning.  Without an optimized plan, execution cannot be effectively and efficiently accomplished and we have to resort to a lot of brute force exercises, including expediting.  Even the best of plans needs to be monitored for required adjustments and we need to have effective processes and systems in place for responding to these changes.

Has your organization implemented a process for responding to change?

On June 15th, I had the privilege of presenting at the world first Chief Supply Chain Officer Summit alongside a very well-known and respected Supply Chain Leader. I say alongside because Angel Mendez, Senior Vice President of Customer Value Chain Management at Cisco (NASDAQ: CSCO), really did the majority of the work. On this occasion, his message focused on the path he’s taking towards creating the “Next Generation Value Chain to Deliver Customer Value” for Cisco. While still a work in progress, with over 9,000 strong under his influence across 90+ locations and 32 countries, my money is on Mr. Mendez succeeding with his endeavor.

It begins with what he believes defines the customer experience value chain:

“Network of internal and partner processes, people and capabilities that translate innovation into customer value while delivering an unrivaled customer experience”

While closely formulated from Forrester’s definition, loosely defined as “activities through which companies create value, competitive advantage, and superior customer experiences”, what I find unique and interesting about Cisco’s definition is the specific attention and promotion of “people” and their “capabilities”. Perhaps this resonates so much with me because I have long believed that collaboration is the next supply chain “optimizer”, and collaboration is decisively a purpose-driven human activity. To be more precise, it is the unifying of actions taken by uniquely capable people for a common good (more on this later).

Angel identified four legs required to support the creation of strategic advantage; Customer Focus, Agility, Collaboration and Sustainability. At first glance, you might find these to be obvious and perhaps not so unique – and indeed, many companies are talking about these elements in one form or another. What is different about Angel’s message, for one, is the maturity and execution of the model. For example, I’ve never met a company who would say they are “not customer focused”; however, most continue to govern themselves according to traditional, and very operationally focused, metrics (e.g. cost, quality, delivery and speed). Cisco, on the other hand, measures their customer focus by focusing on perfect product launch, perfect order, order-to-invoice cycle time and last but not least “moment of truth customer satisfaction measurements” – thus, redefining their balanced scorecard to align with its customer focus.

A significant portion of Angel’s presentation was spent on the Flexibility/Agility leg. What caught my eye most is a theme I am seeing across multiple manufacturing segments, and is becoming a key requirement for many looking to improve their supply chain management and S&OP processes: the growing gap between Demand Chain and Supply Chain. Today, it is not uncommon to see completely disjoint demand side planning (S&OP) and detailed supply chain planning solutions, and yet, it is in between the two where a significant amount of efficiency and performance can be lost. I believe the gap is widening at a steady rate, and this is what is driving the need for new and innovative solutions to “collaborate and effect change in real time”.

So we’re back to Collaboration – the third leg. In my humble opinion, it will be in this area where excellence will be won or lost. You might look at collaboration as the combination of people + processes + technology/tools, but I was very impressed to see a slight variant of this long standing equation. In Angel’s vision, it is “culture” + process + technology/tools. I admit never having thought about it as a cultural challenge, but having worked with many large organizations on this problem, I’ve come to realize how unique a problem this is… collaboration amongst peers and employees is often challenging enough across departments. The type of collaboration Angel is talking about is inter-enterprise – which means that on a given day, you may very well be collaborating with a complete stranger living on a different continent. Indeed, there are cultural implications to achieving this level of maturity.

Again, I might say there is nothing new about promoting collaboration as a key to success; however, it is what Cisco is doing about it that distinguishes them from the rest. They are leveraging many of their own technologies to produce what they call an “Integrated Workforce Experience” (IWE) platform capable of bringing teams together to collaborate and solve ‘moment of truth’ problems that occur in the gap between demand chain and supply chain planning. Unlike social networking platforms, such as Facebook, MySpace and the like, which use friends, family and fun as a hook, I believe platforms like IWE will motivate productive usage and involvement through content, context, and consequence.

Finally, we have Sustainability, which is extremely topical these days as we watch in horror the catastrophe still hemorrhaging under the Gulf of Mexico. Here, we heard some common themes on creating efficiencies and innovations in product design, educating and increasing employee involvement, and a particularly catchy tag line: “Don’t just ‘comply’, lead, innovate, differentiate”. The one resonating message around sustainability, more of a lesson really, is the reminder that sustainability should not be viewed as a factor for competitive advantage, but rather, the one common flag around which everyone can unite and learn from one another. Industry collaboration will be the key to effecting a meaningful and lasting change.

Does Angel’s vision align with yours? Do you see effective collaboration as an emerging competency that will distinguish your company’s performance?

By the way, if you missed the presentation, grab a soda and sandwich and watch the replay of this presentation by registering here.

Our very own John Sicard will be joining Angel Mendez, senior vice president, customer value chain management at Cisco Systems for a presentation on Next Generation Value Chain Best-Practices.

As part of the 2010 CSCO Summit, the free-to-attend virtual event taking place on June 15th and 16th, 2010, John and Angel will co-present the track entitled, “Creating the Next Generation Value Chain to Deliver Customer Value,” on June 15th, 2010 at 9:00 EST (14:00 GMT).

Attendees will learn about Cisco’s supply chain transformation from a cost-centre to a competitive advantage. In response to rapidly shifting business demands, Cisco has focused on integrating previously siloed back-to-front end operations into a single global operations group that covers the extended value network, from downstream suppliers through to upstream customers.  This session will provide critical insights on the lessons learned and the key focus areas to consider.

The CSCO Summit, a two-day event consisting of an agenda of 11 presentations, brings together an influential group of global supply chain, operations and procurement leaders to learn and share best practices around the critical factors driving strategic supply chain and operational agendas across multiple industry sectors. 

To register for this free event, please visit:
http://cscosummit.raptureworld.co.uk/register

Collaboration is without a doubt a key component in many companies’ strategic initiatives.    The touted benefits (the good) are significant and they extend well beyond the financials, to include service improvements and risk sharing.    While some companies have begun the journey with collaborating with their customers, others have elected to start on the supply side.  In virtually all cases, the challenges of making collaboration successful are a series of painful lessons in the dynamics of people, process, and technology.  Attempts to initiate collaboration without a careful consideration of all three elements (the bad) can lead to projects that only deliver a fraction of the promise.  This in turn leads to faulty conclusions concerning the value of continuing the journey.    

I was recently exposed to a project where the customer collaboration project was focused on establishing a clearly defined process leveraging the limits of the existing legacy systems.   The ugly result was overtly complex and I seriously questioned it’s sustainability.  In this case, the relevance of technology as an enabler to simplify and accelerate the exchange of data was being ignored.    On the other hand, investments in technology without serious consideration on the impact to the people and processes can be equally fatal.   

I would strongly encourage any company traveling down this path to evaluate how new technologies are dramatically simplifying collaboration tasks.     My experience in implementing lean systems has shown that high quality results are best achieved when the human component is simple, repeatable, and designed with mistake-proofing in mind.   Consider whether the tools currently at hand will meet these standards and if not, then invest in learning what is available to help deliver the full value of the collaboration promise.

I was reading the article: “2010-Risk or Opportunity?” on SupplyChainBrain.com and it got me thinking about 2010 and the author, Mark Woodward’s comments.

The first topic the author discusses is “Multi-Tier Functionality”.  As more and more manufacturing operations are outsourced it is difficult for a company to have any control over their supply chain because they lack data.  I agree with the author that this becomes an imperative in 2010.  The economy is showing signs of improving however, all of the companies I speak with say the only sure thing is volatility.  No one really knows how the business will be so they will need to be able to react and make decisions very quickly up and down the supply chain.  This requires not only visibility into the supply chain data from suppliers, but the ability to simulate changes in demand and supply to determine how best to make business decisions based on fluctuations in a company’s business.  Ideally, the customer would have the ability to explode the full BOM to be able to make decisions at any level.

As the author states there needs to be a focus on relationship building.  The article talks about the relationships between trading partners and brand owners becoming true partners.  I absolutely agree. Having visibility into data and the brand owner being able to make better business decisions should help the brand owner make better business decisions about what they need from the trading partner and hopefully improve the trading partner’s business as well.  The customers I work with who do this well are able to create many different types of scenarios the simulate changes in demand which allow both parties to keep the lowest amount of inventory and lower their costs.

In addition, I think the brand owners need to focus on the relationships with their customers (as the author states).  Manufacturing companies I talk to are very worried about any significant change in their relationship with their biggest customers.  Typically, the biggest customers not only comprise a large portion of a company’s revenue, they also can be the engine for a company to acquire new customers.  If a top company in a field is using someone, then smaller companies in the same field may want to use that company as well.  So, the ability to collaborate with your biggest customers through a portal, VMI or just sharing data can be critical.  These relationships are also important in the sales and operations planning function for a company.  The best way to have true visibility to demand is a good customer relationship.  I do believe in this volatile market that sales and operations planning for a company will be key to their success in 2010 and good relationships and collaboration will be key.

All in all, 2010 is going to be an unpredictable year for manufacturers and the more visibility companies have in their supply chains, the more they can simulate changes in demand and supply, the better relationships they keep, the better off they will perform next year.  It will be interesting a year from now to see if the best performing manufacturing companies have implemented some of these capabilities. 

Happy New Year!

With the holiday season upon us, many of us are concerned about making the numbers for the year. Most midmarket companies, whether they are public corporations or privately held enterprises, have revenue targets for each reporting period, usually by fiscal month, quarter and year. These revenue targets are obviously an important part of the financial plan and operational performance for the company.

With manufacturing enterprises, a variety of unforeseen events can occur on a daily basis related to customer demand and the supply of the manufactured goods, as well as the supply of required purchased components from vendors. Even with the best of plans going into a reporting period, actions need to be taken to adjust for these unplanned changes in demand and supply in order to meet the revenue target.

I read the recent report titled “Performance Management in the Midmarket“, by David Hatch and Max Gladstone, from the Aberdeen Group, dated November 2009. The thing that struck me is that based on data collected for the report, the top pressure related to performance management for both midmarket and large enterprises is “lag times and the inaccuracy of operational business decisions”. What is stated is that operational performance is negatively impacted when “the lag time for determining operation performance is greater than the decision window (the opportunity to affect performance based on taking or changing an action)”.

The report goes on to identify the major stumbling block is the identification of source data: “During a fiscal period review process, or within an operational performance review meeting, senior executives often ask for metrics and analyses that send their business managers and teams scurrying to find the data that supports the desired answer”. From my point of view, the problem is that data is not readily available to the decision makers. In addition, reports and analytics need to be available against the data for review and to enable effective operational responses. The data and reporting cannot just be looking at the past, but the analytics need to be forward looking to provide information to decision makers so that actions can be taken to meet the performance metrics.

The operational requirement to meet revenue goals for reporting periods is a common concern among midmarket enterprises and could also be viewed as a fairly standard process across entities. Also, given that the absence of source data and the required reporting and analytics is also common, there exists a real opportunity for a standard solution. Midmarket companies can increase their effectiveness at meeting revenue goals by implementing an out of the box solution. The best solution will have the following key attributes:

• Standard integrations with various MRP/ERP systems
• “Cloud computing” enabled – midmarket companies can subscribe to the software rather than having to stand up and manage the infrastructure and software
• Simple to use with little or no training required
• Easy to tailor and configure if needed

Of course, many other operational issues could be targeted other than revenue management and with today’s technology, many solutions that only large enterprises have the resources to invest in can be made available to the midmarket. What do you think?

I was talking to a Contract Manufacturing company the other day and discovered an interesting  predicament.

A hot-button issue for this Contract Manufacturer (and others I’ve talked to as well)  is the need to get better information from the Brand Owner about how the product is selling to the end customer.  The Contract Manufacturer’s concern is that the forecast changes from the Brand Owner often come too late to prevent procurement of components needed to satisfy the current forecast. If the CM had better visibility to demand, and more importantly to the rate of consumption, they could provide an essential service to the Brand Owner by warning them about unrealistic forecasts BEFORE the purchase orders go out..  Additionally, the CM would like to be able to challenge new forecasts as well…if only they had the data.  This could save the Brand Owner millions of dollars in inventory liability!  Unfortunately, the Brand Owners often don’t want to give this information to the Contract Manufacturers. 

Amazingly, when talking to Brand Owners, I’ve often heard them say that if only they had access to the contract manufacturer’s data,  they could evaluate changes to the supply plan and make sure they are realistic before we send it to the Contract Manufacturer. Not only that , but we could get visibility to shortages to the Contract Manufacturers and we could help apply pressure to component suppliers   Unfortunately, the Contract Manufacturers don’t want to provide detailed manufacturing information to the brand owners as they fear that the Brand Owner would want to interfere with their planning processes.

So both Brand Owners and Contract Manufacturers feel that they need more information from the other party to better manage the relationship, but yet neither are willing (or are able to) provide this information to the other party.

Hmmm.

So what is the answer?  I have my thoughts, but I’d be really interested in what you, the reader, has to say.  I suspect that many of our readers either work for a brand owner of some sort or a contract manufacturer of some sort.  What level of visibility do you provide to your business partners?  What information do you hold back? Why?  Do you have clearly defined roles about what the Brand Owner does and what the Contract Manufacturer does?

Comment back and let me know what you think.

The latest edition of IndustryWeek’s Manufacturing Business Challenge has been published.

This month’s challenge discusses a large, multinational manufacturer of industrial equipment that is looking to improve its purchasing practices after discovering that they were literally leaking money by not fully leveraging its purchase volumes and buying power.

I took part in providing one of the solutions, as did Corey Billington, Professor of Operations Management and Procurement at IMD.

Tell us what you think of our responses to the challenge as described below:

I am the CFO of Tevper Performance Products, a large, multinational manufacturer of industrial equipment. Tevper sources hundreds of thousands of components, materials, and services every year, which account for billions of dollars. The VP of procurement and I have convened a team to review and improve our purchasing practices throughout the organization.

The impetus for the review was discovering that we are literally leaking money by not fully leveraging our purchase volumes and buying power. I don’t expect all of our 13 production locations to source in an identical manner: Many have total-cost formulas that are best served by tapping into local suppliers. Others require nearby sourcing to reduce lead times. Some are constrained by how and what their outsource manufacturers choose to purchase. But even after lightly scratching the surface, I see countless missed opportunities for Tevper to lower our costs for direct and indirect materials. For example, at our Arizona location, I can find a variety of suppliers, product numbers, product names, and pricing for the exact same component. This must stop.

In my five years at Tevper, we’ve taken a light hand toward strategic sourcing, believing that well-trained, local procurement departments would make the right decisions: implement sourcing processes and systems that enable them to understand, aggregate, and control procurement activity that is occurring within their location or division as well as make purchasing decisions consistent with other business units. I have respected their autonomy, but cannot afford to do so any longer.

The VP of procurement, the review team, and I must, first, uncover the most egregious purchasing problems and put an end to them as quickly as possible. But, more importantly, we need to begin developing the means and systems that allow comprehensive and real-time tracking and reporting required to achieve high levels of purchasing performance even within our diverse and distributed business model. It will be a challenge, and, as word has leaked out, I am seeing the emails stream in: “Our supplier relations are unique,” “You’ll never get our purchasing data to be compatible,” and “We don’t have time to make every purchase align with corporate mandates.”

I don’t have time for their excuses. And my future with Tevper may rest on my ability to install a major strategic procurement program. Can it be done?

See our advice here. What advice would you give?

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?