Globalization

Getting Supplier Risk in Focus – Part One

Getting Supplier Risk in Focus – Part One

The last few years have been an awakening for business and consumers on what globalization, unrestricted trade, and all out web commerce really means—both the good and the awful—with often negative consequences for consumers and economies. Outsourcing continues to exacerbate the risk profile with sourcing requirements driving to the lowest cost vs. requirements for quality, fair labor standards, and rich communications and information capabilities of the suppliers.

Lower tier supplier risk on risk can be quite high

Companies who have poor visibility into the source markets are blind-sided by lack of information not just about their suppliers’ conditions, but the overall market and environment in which the supplier operates—politics, poor weather, geological conditions,  plant shutdowns, pollution and unstable currencies—that can affect supply chain performance. However, there is a growing trend to reverse the traditional arm’s length and ocean distant relationships with suppliers in order to understand the source markets, the suppliers and, yes, even to assure workplace safety.

But companies need to understand the multi-tier landscape: who their supplier’s supplier is. In Part One, we’ll look at a few issues to understand what we are up against, and in Part Two, I’ll share some methods to solve some of these issues.

Focus on the Supply-base

Multi-tier View

Fact is, most companies lack a method to connect effectively with their direct suppliers in a multi-tier chain. Reliance on portals or EDI/Messaging merely to communicate about orders limits the ability of firms to understand their supplier in a broader context. There is seldom connectivity in a way that allows for conditions in the source market such as raw material shortages, labor issues or even potentially environmental disruptions.  Most disruptions don’t make the international news, such as tsunamis or volcanoes. Icy conditions causing delay in regional transportation, a plant shutdown due to power outage or accident don’t make BIG news, but if they happen to your supply chain it can be devastating.

Risk Assessment in the Supplier Selection Process

Considering various legislation and industry standards from RoHS, WEEE, Frank Dodd, Foreign Corrupt Practices, Lacy Act, FDA’s Food Safety Modernization Act, various sourcing and quality standards (such as COOL), and the Consumer Protections Safety Act of 2008, it seems that most industries have both a moral and legislative standard that at least sets a direction for what they should be considering in supplier evaluations.

In research we conduct regularly, it was revealed that less than 50% of the companies we surveyed consider risk metrics in their evaluation of suppliers. And no wonder, “fewer than 30% even had a published set of resilience and risk mitigation standards for their suppliers” (figure 1). The foundational thought process is not really in place, then, to even consider beginning a formal metrics driven evaluation.

 

What role does risk assessment play in your supplier selection process?

Monitoring and Mapping Supplier Risk

Many companies are not directly responsible for sourcing of tiers two, three and beyond. It may be debatable for those who don’t whether they should play a greater role in sourcing decisions, but there is no debate that the impact of lower tier suppliers on risk can be quite high. Even when the customer/Tier 1 takes a direct role in selecting the supplier, the source plant/location can change, what to say of raw materials and ingredients. That is why not just mapping, but monitoring the supply chain is important. The ability to map multiple tiers of the supply chain is critical to understand what components are manufactured by whom; and then monitoring, which provides visibility to events on the ground—the where and why—in  order to understand the impact of those events on a company and its supply chain.

Product on the Move

The ability to track products is crucial to reducing supplier riskMost things go wrong once the product is in motion. There is a reason that maritime transportation is the oldest insurance sector and still is one of the largest. But whether international or local, having the ability to track products is crucial. For a manufacturer or retailer, your logistics service providers (LSP) should be doing the actual tracking, but most products travel through multiple carriers and ‘legs’ from source to destination. LSPs are not known for great integration between each other. Products are packed, unpacked, repacked, relabeled, and generally batched-up in so many ways that it is hard to be precise about who has the material and where it went.

Along with this, many industries and regulatory environments require traceability. Food and Pharmaceutical come to mind. But as I mentioned above, the Consumer Protection Agency of the US government now requires brand companies of even simple consumer products to know the source. Consumer products are an extremely broad scope of industries, yet across many of these sectors consumers are wanting to know: who made this; where did it come from; how was it produced. Tracking and tracing information, though, is important, regardless of regulations, when companies have quality issues or recalls.

Consumer protection and effective execution of reverse logistics can be solved by item level tracking. Methods and technology that track products and materials flowing through the supply chain on a very granular level are key to managing many types of risks. The data model in your systems needs to reflect the supply chain route as well as item level intelligence to reduce various risks in the chain.

In Part Two of this series on Supplier Risk, I’ll look at some solutions to manage and alleviate these risks.