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 the 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.
In addition to buy-side initiatives, supply-side factors can create risk in several ways:
Financial pressure—Suppliers at all tiers are under intense financial pressure brought on by the global economic slump and increased competition. This financial pressure can cause suppliers to aggressively cut their own costs—often through lower inventories, layoffs, and plant closings. The result? Poor quality and delivery performance, and in extreme cases, financial failure altogether.
Technology gaps—In many industries, technological innovation begins with the companies that can spend the most: the mega raw material providers on one end of the value chain, and the OEMs on the other. This leaves a myriad of small to mid-sized companies in the middle with varying degrees of technological capability. Having a slick supplier portal that cascades build schedules is no good if the supplier can’t—or doesn’t—leverage it.
Consolidation—M&A activity, while slower in recent years, is still happening, and it impacts buyers and suppliers alike. Whether your supplier is the one being acquired or the one acquiring, it changes your relative bargaining position and can divert their attention from customers.
There are also a number of macro trends that help create supply risk, including:
Globalization—This trend continues to bring with it huge opportunity to help companies lower costs and reach new markets, but it also introduces new levels of cultural and economic risks. These include cultural barriers and differences, currency risk, language barriers, logistics challenges, and taxes and duties.
Industry consolidation—The rapid consolidation of many industries has accelerated the need to create more efficient, shared-cost centers inside organizations that benefit from global scale, reach, and leverage. Indeed, shareholders on both sides of many mergers are banking on purchasing synergies that supply managers must deliver through taking a broader portfolio approach to their shared spend. The risk for buyers is twofold: when suppliers merge, relative leverage changes, and when buyers merge, new opportunities arise that must be captured.
Geo-politics and trade—While politics and cross-border regulation can increase supply risk, global uncertainty, and instability from terrorism also play a roll. Going beyond the tax and tariff issue, what, for example, would an organization’s manufacturing impact be when a one-week container back-up hits West Coast ports after a terrorist threat? As recent world events have demonstrated, global terrorism, regional conflicts, and even disease can all create supply risk.
Taken together, these macro issues present a significant potential threat even to largely domestic organizations that choose to ignore them. But truly global enterprises face an even greater level of uncertainty and risk in this environment.
Curious? Drop Sydney a line (firstname.lastname@example.org) and we’ll send you out 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: