Companies need to make suppliers partners in order to reduce supply chain risk and minimize it. This involves creating open relationships where suppliers can freely share information and not fear of being punished. This is why suppliers must be proactive in pushing critical information to manufacturers, and not reactively pulling information from suppliers by them. All suppliers must be expected to play fair and to keep companies informed about potential risks.
All types of companies have been affected in the supply chain chaos caused by the pandemic. However, many of their operational problems over the past 18 month were not caused by the pandemic. These problems are a result of a fundamental problem in the way companies deal with suppliers and product suppliers. Manufacturers will remain at risk even if there are no black swan events until they find new ways to collaborate with suppliers to ensure transparency about the source, availability, life cycles, and cost of mission-critical components and products.
Many companies are aware of the impact that supply chain transparency has on their ability to produce and deliver products. However, very few companies have a process in place that requires suppliers to provide important information about their supply chains and products. They either wait passively for the critical information or try to gather and manage these insights on their own. This leaves them without the details or depth that only suppliers can offer. Companies often react to adverse events instead of planning for them. Companies place too much importance on the price of components or products and neglect to consider their supply chain risks.
My experience with companies suggests that they rarely discuss risk-related concerns and may not know where to look for suppliers. They also tend to be more concerned about penalties than the root causes for missed delivery deadlines. Suppliers are often asked for prices and lead times, but do not ask about regional trade, compliance issues, product obsolescence or sustainability.
The current manufacturing environment is complex and there are no standards for acceptable supply chain risk. It is essential to establish formal relationships that align the interests of both the supplier and the purchaser. This type of non-transactional, high-level support is not possible without significant investment of time and money. These relationships should also be built on trust so suppliers feel comfortable sharing negative information with customers.
To see meaningful changes in supply chain management, the fundamental dynamics of the supplier-company relationship must shift from reactive pulling information from suppliers to manufacturers to proactive pushing critical information by suppliers. All suppliers must be expected to play fair and to keep companies informed about potential risks.
It is difficult to try to reorder industry practices or establish new protocols. Your company must be able to see that the benefits of supplier relationships based on transparency far outweigh any difficulties associated with managing the change process. It is important to be willing to do anything to achieve your goals and to communicate that sense of purpose. These are some of the lessons we have learned about creating such a dynamic.
Create a constructive tone
Suppliers must be aware that supply chain risk management should be a top priority. They are your company's source of critical information. You want to create a formal system that is transparent and accountable. Our common goal is to establish a clear path for suppliers to communicate supply chain risks your company can address before a problem occurs. It's not about blaming others after a negative event.
Some companies that we work with have regular scheduled calls with strategic suppliers to ensure risk management and monitor changing conditions. The call notes are also shared with key internal stakeholders. These calls encourage suppliers to take decisions based upon identified risks, and can help avoid stock-outs and other unanticipated problems.
Start at the Design Phase
So that your supply chain resilience can be established from the beginning, consult with suppliers during product design and specification. Suppliers should respond to detailed checklists of risk factors and associated responsibilities with each quote submitted (see exhibit A Checklist Supply Chain Risk Factors). Your company can then choose to accept, share, reject or modify these risks. These risk factors could include the country of origin for the components or systems in question, the product's end-of-life dates and how long you have been a supplier to the manufacturer.
Your procurement team can also identify risk requirements in requests to quote (RFQs), master service agreements, and other documents. This will allow them to take into account risk factors when reviewing proposals. Your product engineers and other downstream decision-makers can be made aware of supply chain-risk issues before they start designing the offering.
Anticipate Supplier Pushback
It takes time to understand the customer's requirements and provide details about supply chain risks. Suppliers may be reluctant to provide details on supply chain risks due to the added administrative burden and potential legal liability for failing inform clients about risks. These obstacles can be overcome by showing a willingness and ability to build deeper, longer-lasting relationships with suppliers in return for risk-management partnerships.
Use leverage if necessary
Most suppliers will be able to see the consequences of not cooperating with customers requests for transparency. Although strong-arm tactics can be counterproductive, it is possible to win business by requiring suppliers to cooperate in providing the necessary information. When reviewing suppliers' performance, it is important to consider whether they can deliver accurate supply chain-risk data consistently.
Make sure that the information is applied
Your company's product and engineering departments need to receive timely information from suppliers, including end-of-life notifications and risk factors for certain components. Your product development team might decide to eliminate components because they are more expensive, but not knowing about their lower supply chain risk.
Large medical device manufacturer with transparent risk management processes discovered that the low-cost adapter it used in its most profitable devices was made by one company in China. It could not be exchanged for any other adapter. Instead of accepting these brand reputation and performance risks, the company reengineered the device to accept a wider range of power adapters.
Your suppliers should also have access to internal personnel, who can provide detailed specifications and authorize the approval of supplier recommendations.
Set up a system for evaluating and mitigating risks
Your company cannot rely on supplier transparency alone to reduce risk given the high stakes involved in reputational, financial, and operational operations. Even with well-structured agreements between cooperative suppliers, there will always be the possibility of information gaps and unanticipated events in supply chains. Your company might not have properly communicated to a supplier the critical nature of a part. Unanticipated disruptions, such as the one that happened when a huge cargo ship became stuck in the Suez Canal last March, cannot be predicted. Companies should have a data-driven process within their supply chain risk assessment and a risk mitigation plan that is endorsed by and closely monitored.
What kind of company are you?
Manufacturers will likely be affected in one way or another by the supply chain disruptions in recent months. Many companies will see them as a wake up call to improve their risk management strategies. Others may conclude that there is no chance of another similar event happening in the near future and that they cannot afford to take additional measures to manage risk. This is a big mistake.
It is not risk management to play the lottery. The global supply chain becomes more complex and interconnected, increasing the risk of disruptions. Companies need to plan accordingly. These plans should include a revamp of how you choose and work with suppliers in order to increase transparency, share of risk, and ensure sustainability in your supply chain.
