Supply Risk: The Sub-Tier (or Multi-tier) Challenge

Spend Matters would like to welcome back Sherry Gordon, our resident supplier performance management expert – and my co-conspirator in getting to the bottom of supply risk technology. There has been a lot of discussion lately on Spend Matters about supply risk. One very challenging area within this arena is sub-tier supply risk. It can be hard enough to find out what's going on with direct suppliers, but what about their suppliers and their suppliers' suppliers? Understanding sub-tier supplier risk is an important challenge, and has long been an area that the aerospace and defense industry has been trying to address. One failure to conform to DoD rules or one supplier problem can adversely impact multiple prime contractors. This situation occurred when an existing government regulation, the Berry Amendment (regarding metals that go into DoD products) was suddenly enforced. It caused over 50 suppliers in violation to be put on a stop-payment list.

There are no easy answers. The A&D supply base is not controlled by the primes at the top, and many sub-tier suppliers are not captive to the A&D supply chain. Getting the lower-tier suppliers to comply with a prime's requirements, let alone finding out who these suppliers are in the first place, is challenging. The primes have contracts with their direct suppliers, not with sub-tier suppliers, so they must rely on direct suppliers to manage their own first-tier suppliers but not lower-tier suppliers, over whom the direct suppliers have no direct control. There is no gain in higher tiers usurping the supplier management responsibilities of their direct suppliers. Since most of the supply chain works well, it is easy to overreact in the wrong places. Therefore, primes need to identify and mitigate the biggest risks in a vast supply chain. In other words, they need to find the needle in a haystack.

From my work in A&D, I learned that supply risk is much more than identifying supplier bankruptcies and non-compliance. For example, one of the big challenges is the flow down of contract and technical requirements and changes from the primes. Did you ever play "telephone" or "whisper down the lane" as a kid? Remember how distorted the words would get by the last person, bearing little resemblance to the original phrase? A similar situation can happen in interpreting a customer contract (both in the proposal stage and after the award) and flowing requirements and subsequent changes down to the supply base. Sub-tier suppliers' understanding of what they are supposed to do can become a huge problem if this flow down is not done well. Problems (and the supplier causing them) may not be discovered immediately, sometimes not until there is a problem at the end customer. Another risk area lies within poor supplier management skills and practices, which are notoriously underdeveloped in the lower tiers of the supply base. For example, many lower-tier suppliers have no source selection process.

While technology may be used as a means to gain information and insights into the sub tiers, technology is typically ahead of business practice. Getting suppliers to participate in sub-tier risk efforts is complex, as they can be fearful about competitive issues, the confidentiality of the information, how it is going to be used and whether it is going to impact their business. Even when sub-tier risks are identified, addressing them is challenging. Building and sustaining win-win relationships with key direct suppliers is a start.

-Sherry Gordon

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