This morning, I'd like to welcome back a regular guest columnist to Spend Matters. Brian Sommer is a Senior Fellow at Azul Partners, founder of Tech Ventive, and is author of the blog Services Safari..
Jason and I have two different definitions of sustainability. When I look at sustainability in Spend Management circles, I think of the long-term viability of buyers when their suppliers and other components of their supply chain are no longer in business or are having difficulties.
In the May 2006 issue of Supply Chain Manufacturing & Logistics page 16 is a graphic by GT Nexus. It shows what happens when buyers shift from domestic to global suppliers. The variability of order deliveries grows massively. In this table, domestic supply chains might take 7 days to complete an order with a delivery variance of +/- 3 days. Global supply chains may require a 25-65 fulfillment window with a delivery variability of +/- 25 days.
Lean manufacturing principles are great ideas but when variability of this size and magnitude exists, there also exists the potential for catastrophic harm to the firm with all of its eggs in one overseas supplier's basket.
CPOs have to factor in the variability and risk of individual suppliers and every link in their supply chains. A CPO can cut a great deal on a commodity purchase but if the deal creates an uncovered risk of moderate to high risk, it can bring down the CPOs employer. General Motors is certainly concerned about the risk of business failure by Delphi. And yet, supplier bankruptcy isn't the only sustainability risk CPOs should fear. These additional risks include: - transportation strikes
- port loading/unloading delays
- rail strikes/slowdowns
- acts of god: fire, earthquake, hurricane, etc.
- actions by governments and government officials
As supply chains get more global, more firms are involved in the delivery process. As more players get involved, the mean time between failures gets much shorter. That's not a good thing. CPOs have to manage each risk in the process and develop ways to mitigate these risks. The single most effective technique to mitigate risk is to take a page from equity investors: diversification.
When CPOs diversify global supply chain risk, they place a percentage of their order with one supplier and split the remainder with two or more other capable suppliers. The best diversification strategy though goes further in that some product is sourced domestically (for the most rapid replenishment of supply), some may be sourced from a near source country and the latter can come from a low cost country source. Commonly referred to as a 60/20/20 or 50/25/25 deal, the process can reduce supply risk by using a mix of transportation methods (domestic truck, international truck, oceanic container, etc.) from different geographies (same country, same continent, trans-oceanic) from completely independent suppliers with few or no overlapping second tier suppliers.
Should anything happen to any one supplier; or, the myriad of tier 2 firms that supply them; or, the many firms and governments that handle the goods being transported to the buyer, other supply options exist.
Yes, diversification costs a little more, but, I've yet to find insurance that doesn't cost something. If your shareholders value business sustainability, build some supply chain insurance into all of your global Spend Management dealings.
Brian Sommer authors the blog: Services Safari.