Friday Rant: Rising to the Multitier Challenge — Digging Into What Our Suppliers Buy (Part 2)

In the first part of this rant, I introduced a number of elements of the multi-tier challenge when it comes to knowing more about our supply chains -- specifically what our suppliers buy and who they buy from (not to mention the same of our suppliers' suppliers' supplier(s)). For review, I specifically noted the difference between multi-tier micro (MT-Micro) and multi-tier macro (MT-Macro) issues. In today's post, I'll continue by sharing a number of the MT-Macro areas we need to be aware of when it comes to the multiple level of suppliers that combine to form our individual product and service supply chains. MT-Macro issues include, for example, our overall exposure to specific commodity inputs in our extended supply chains that are not supplier-specific. It also includes the make-up of our extended supply base geographically and whether or not lower-tier suppliers cluster around a certain country, region, or world geography (e.g., certain lower-tier high-tech suppliers often cluster in Taiwan, China, Japan and other Asian markets).

MT-Macro issues also include commonality and concentration of lower-tier suppliers with tier-two vendors (for reasons we'll get to a minute, but aren't just limited to risk reduction). Another MT-Macro issue for consideration is multitier supply chain exposure to other industries based on lower tier suppliers (e.g., do groupings of lower tier suppliers serve industries are which are likely to be at higher risk due to cyclical or other downturns in the economy? -- e.g., automotive, housing, etc.)

By gaining visibility into both MT-Micro and MT-Macro information and data -- ideally on a continuous and automated basis -- we can implement an entirely new range of strategies that extend beyond the obvious (e.g., supplier diversity, single-tier supply risk reduction). For example, we can begin to pursue initiatives that consider more holistic supply chain risk management, looking across our entire extended supply chain to identify the weakest possible link in the chain. With this visibility, we can spot at-risk suppliers based on any number of factors that we previously most likely didn't even know that we had exposure to.

Sourcing-wise, in addition to reducing risk (e.g., by requiring our the reallocation of spend across a more geographically diverse pool of lower-tier vendors on a required split-of-business basis), we can also begin to drive specific sourcing initiatives that can help reduce costs while actually benefiting suppliers when we have greater access to both MT-Micro and MT-Macro information. In the case of metals, resin, energy, etc., these opportunities may include demand aggregation programs (which may lead to concentrating spend with specific vendors and/or hedging overall exposure) that can pool spend on a multi-tier level to drive business to specific distributors or producers.

Under such programs, companies may opt to have carrot or stick approaches, requiring lower-tier vendors to participate. One stick approach is to include supplier rebate programs that require the distributor/producer to cut a rebate check at the end of every quarter or year (usually split between the OEM and the lower tier suppliers) based not just on overall volume commitments, but actual spend with the vendor in question.

Multi-tier visibility also allows us to change our strategic sourcing orientation from one of fixed bidding packages to a model where we consider alternative supply chain designs from suppliers (e.g., whether or not a current supplier conducts a specific process or value-added step or if another vendor at a different tier is better suited to handle it). This may include something as simple as kitting, bundling and/or assembly of different parts or components -- or it may include a supplier conducting an entirely different process in-house vs. sending it out to another vendor or buying an alternative product on your behalf (e.g., a heat-treating process). For further reading, please see our research on the subject: A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing: When Collaborative and Quantitative Approaches Would Have Delivered More. In the final installment of this rant, later today, I'll offer up some thoughts on where and how companies can get started when it comes to building visibility into multi-tier supplier information.

Jason Busch

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