This post is based on the following FreeMarkets white paper (published in 2003) co-authored by Jason Busch and Mark Clouse, Global Supply Management: Strategies for Identifying and Managing Supply Risk. I recently dusted off this paper for my own research into supplier relationship management and found an analysis that was nearly every bit as relevant then as now. Enjoy! And since it’s not available online, drop us an email if you’d like a copy.
Supply Risk Defined
What exactly is “supply risk"? George Zsidisin, Assistant Professor of Supply Chain Management at Michigan State University, recently defined it as the following:
“… the potential occurrence of an incident associated with inbound supply from individual supplier failures or the supply market, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety.”
In addition to missed customer expectations and safety concerns, however, there are other more insidious outcomes of supply risk. These include:
- Paying more than market price
- Carrying excess working capital
- Losing production time
- Over-specifying a good or service
- Taking too long to execute and implement savings
- Losing bargaining power
- Selecting less innovative suppliers
Clearly, understanding and avoiding supply risk is a necessary part of every GSM strategy.
Sources of Supply Risk
At a high level, supply risk is driven by three things: the buying company, the supplier, and the economy at large. First, a number of business trends are forcing buying companies to increase the levels of supply risk through various initiatives. These include:
Outsourcing: An increase in outsourcing of all types, from manufactured assemblies to business processes, implies two key trends. First, a greater percentage of what a company ultimately sells is being created by another company. This loss of direct control creates more opportunities for supply risk. And second, the Chief Purchasing Officer (CPO) is now managing a portfolio that consists of larger financial commitments to suppliers (which were previously run by functional units internal to the organization). Consequently, the financial stakes to the company are higher should things go wrong.
Low-cost country sourcing: Low-cost country sourcing—purchasing from countries such as mainland China and Mexico and regions such as Central and Eastern Europe—is a major business imperative. For example, Ingersoll Rand recently embarked on a plan to increase the percentage of suppliers it uses from low-cost countries from 5% to 30%. This trend is not just limited to manufacturing. Thanks to the improving quality of services available abroad and increasing global connectivity, many firms are looking to source professional services—from IT to engineering—from low-cost countries such as India. Whether a company is sourcing services or goods from low-cost areas, many new risks can be introduced from quality issues to on-time performance.
Lean production: Lean techniques can ultimately lower the levels of supply risk by improving quality, shrinking cycle times, and lowering costs. Often, though, implementations of lean techniques are marred by the lowering of buffer stock and poor collaboration with suppliers. This can lead to missed customer delivery schedules and lost revenue.
Supplier consolidation: Working with fewer suppliers and integrating suppliers more tightly with the introduction of new products increases leverage and may reduce total cost, but it also increases supplier dependency—a classic source of supply risk.
Curious? Drop Sydney a line (firstname.lastname@example.org) and we’ll send you a copy of this dusty old analysis! Some topics are timeless. And supply risk is one of them.
See additional Spend Matters research coverage below: