How companies are managing risks across multiple tiers, as well as the secondary (indirect) effects of events on the ground.
Full Article Below -
In Part One and Part Two of this series, we examined the investments being made in managing risk, the level of executive involvement, the role of the supply chain group, and how well companies are doing in managing various risks. Here in the third and final part, we look at managing risks beyond your immediate suppliers.
Managing Multi-Tier Risks and Secondary Effects
In our survey, we found that the vast majority of respondents (nearly 80%) do not manage risks beyond their immediate first tier suppliers. Instead, they rely on their immediate suppliers to manage those risks (see Figure 9, below). The tsunami highlighted the risks in that approach and the importance of being aware of the impacts across multiple tiers of the supply chain. Many companies were impacted not by their immediate suppliers, but by their suppliers’ suppliers or by secondary effects of the tsunami. For example, Japan makes over 60% of the world’s supply of silicon wafers used in manufacturing semiconductors. A worldwide shortage is predicted due to many wafer plants being shut down. If you are a high tech, automotive or medical device manufacturer, you don’t buy from these sources directly, but will very likely be impacted. In another example, 70% of the world’s supply of aluminum electrolytic capacitors comes from Japan. These are used in a wide variety of applications such as filtering power supply outputs, motor start capacitors, audio applications, energy discharge, photoflash, and strobe applications. Industrial manufacturers, camera and cell phone makers, and many others may be impacted by those shortages, even though they do not buy those capacitors directly.
It is risky to rely solely on your suppliers to deal with those shortages. Often times, suppliers are reluctant to be forthcoming with bad news, as they scramble and hold out hope that they will find alternative sources. By the time their situation becomes fully clear, it is too late. Having an understanding of the complete supply chain can be advantageous. You are in a position to know where there is capacity and constraint, and which suppliers are in a position to secure that limited output. This gives you a clearer picture of the true risks for your immediate suppliers, as well as an understanding of which alternate sources might have access to the limited supply. Then you can pursue those specific alternate sources more vigorously.
As another example of a secondary effect, we spoke with a printer that sells exclusively into the North American marketplace. They source almost 100% of their paper from domestic sources, so you would expect minimal or no impact from the tsunami. Yet the destruction of Japanese paper mills caused the customers of those mills to look elsewhere for paper. They have started buying from North American mills which has aggravated an already tight supply situation in this market. The ripple effects of an event of this magnitude extend around the globe, across industries, and certainly across tiers of the supply chain.
Figure 9 – Management of Risk Across Multiple Tiers
Although almost 80% do not manage beyond their immediate suppliers, between 15%-25% of companies take a more active role in managing tier 2 and 3 suppliers or beyond. This can take different forms:
Materials Going into Contract Manufacturers—Contract manufacturers in some cases have responsibility for procuring all the materials and components. Nevertheless, their OEM customer may take an active role in managing supply risks for those components, knowing that any hiccups are going to hit them directly. After all, it is the OEM’s line that will go down without those components.
Industry-wide Shortages—Some companies have been burned by shortages in materials or capacity in tiers upstream from their immediate suppliers. Examples we have seen include shortages of tantalum powder for making tantalum capacitors which are critical in mobile electronics. Or shortages of specialized high grade titanium sponge used in making titanium sheets or structural steel from which aircraft engine components and other high performance parts are made. Some companies in these types of industries have learned to scout out demand and supply beyond their immediate suppliers to get an early warning on industry-wide constraints. In those cases, they will take steps to ensure that their needs are met.
Critical Tier 2 or Tier 3 Suppliers—There may be critical suppliers in your supply chain that are not your direct suppliers. They may have unique capabilities or resources that are difficult to replace. In that case, a company may manage those risks closely as well.
A variation on the 80/20 rule seems to apply here—it seems that 80% of companies are weak at managing supply chain risks. It has become obvious, not only from this research but also from current events of the last few years, that most companies take a reactive approach to supply chain risk. They are often caught unprepared and go into “fire drill” mode when a disruption occurs, which is generally much more costly than preventative strategies in terms of the negative impact on brand, recovery time, loss of revenue, loss of market share, and distraction from other business activities while trying to cope with these events as they are happening. Companies frequently underestimate the impact of events. And they may be last in line as supplies tighten, further impacting revenue and market share.
In contrast, the other 20% of companies are proactive in managing supply chain risk. They often have a dedicated supply chain risk group. They have multi-faceted early warning systems in place to raise the red flag before disruptions occur. They are constantly monitoring the situation on the ground and across the globe. They recognize the need to understand and manage risk across multiple tiers of their supply chain.
The difference can be largely attributed to the leadership within the firm. We almost always find people at lower levels on the front lines who are acutely aware of the risks faced and are lobbying for resources and policies to mitigate those risks. But top executives are pulled by many forces and with many demands for resources and investments. Those who take the attitude “these same events are happening to everyone, so why should I spend time and money on this” really miss the true opportunity. Disrupting events can be critical turning points in the evolution of a sector that determine the future winners and losers in an industry. Those leaders will come out on top who understand risk impacts and provide the leadership and investments needed for their enterprise to proactively deal with inevitable, disrupting events.
The entire report (Parts One, Two, and Three combined) is now available HERE.
Appendix A: Supply Chain Risk Related Research and Resources