Risk is a painful reality in manufacturing today. Strategic initiatives like low-cost-country sourcing and supplier rationalization programs only increase manufacturers’ exposure and vulnerability to the risk of supply chain disruptions.
Working with Open Ratings’ Fortune 500 manufacturing customers, I’ve come to realize that even the most sophisticated companies need a reminder for the different types of risk, and how to mitigate each. As I see it, the best way to avoid the inevitable is to understand the many sources of potential risk – which can be defined in five broad categories – and put strategies in place to mitigate each one:
- Strategy Risk = Choosing the right supply management strategy.
Know that what’s right for one business might not be right for yours. For example, a small family-run business may opt to source locally because they don’t have the resources needed to keep an eye on global suppliers.
Mitigation and Management Approach: Define the right up-front strategy, and identify and qualify the right suppliers, using reliable market intelligence to drive decisions.
- Market Risk = Brand, compliance, financial and market exposure.
When outsourcing part production or even entire product lines, you’re putting your company at the mercy of your suppliers. If they deliver a sub-par product, or fail to deliver completely, your customer will be looking to you – not them – for an explanation.
Mitigation and Management Approach: Pinpoint the product line’s quality standards tolerance, and determine the possible impact of a compromise. Monitor those lines closely to detect early-warnings before issues wreak havoc with your firm’s brand, ability to meet compliance regulations and the bottom line.
- Implementation Risk = Supplier implementation lead-times and production/performance ramp.
Know who you’re working with and what their capacity issues are before signing on with them. Working with a supplier for whom your business only represents a fraction of their revenue means you may not get the level of attention that you want.
Mitigation and Management Approach: Ramp new suppliers quickly to gain early visibility into any risk factors that might hinder production, lead-times, initial performance, etc.
- Performance Risk = Ongoing supplier quality and financial issues.
Now that you’ve selected a supplier, there’s still a lot of work to be done. Businesses are acquired, go out of business or shift strategy every day, so constant vigilance is needed.
Mitigation and Management Approach: Continuously monitor all of your suppliers to avoid disruptions caused by bankruptcies, performance issues, ownership changes, labor strikes, geopolitical changes, etc. You may need to tap technology to effectively achieve this level of monitoring.
- Demand Risk = Demand and inventory fluctuations and challenges.
While some suppliers jump at the chance to take on new opportunities, enthusiasm doesn’t necessarily mean they’re in the best position to excel.
Mitigation and Management Approach: Watch your suppliers carefully for signs that they are overwhelmed with new business. Don’t let their desire to grow their business affect your commitments.
Risk will always be inherent in the supply chain. By implementing a comprehensive, proactive approach and working with your suppliers to define a strategy based on shared business goals, you will reduce your exposure to risk – and the catastrophic impact it can have.
Not only will you gain new ability to mitigate issues before they wreak havoc on the supply chain, your brand, and the bottom line – a supply risk management framework also supports more informed supplier development, and total-cost decision making to further reduce inventory levels; improve supplier quality; and remove additional cost and waste out of your supply chain.
The best-laid strategies require your team to shift their mind-set, to divide their attention equally between cost-reduction efforts and risk mitigation considerations, but the rewards are well worth the effort.