Supply Risk Management: Exploring A Real-World Case of Strategy Risk
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. As context for this post, “strategy risk” is one of five drivers of supply risk we identified in this paper originally (the others are: demand risk, market risk, implementation risk and performance risk). Enjoy!
Oftentimes, companies fail to align their business and supply strategies, choosing to tackle one-off savings opportunities instead of developing a holistic approach. For example, if a company embraces lean manufacturing principles on the corporate level, logic dictates that a key supply management strategy should be focused on identifying, partnering, and developing suppliers who can support lean production techniques. In some cases, a supply management organization might find that external suppliers are more capable at manufacturing or providing a specific service. In this case, the buying organization might opt to source to outside suppliers to meet their supply need rather than attempting to do things themselves.
Strategy risk can also manifest itself when companies take on unnecessary—and potentially costly— financial risk. One well-known example of a manufacturer taking on unnecessary financial risk through adopting the wrong supply management strategy involved Ford Motor Company. In 2000, Ford began to corner the world market for palladium—a precious metal used in the manufacture of motor vehicles.
The company’s action helped push the price of palladium up from $500 an ounce in 2000 to over $1,125 an ounce by early 2001. But by mid-2001, demand had slowed and new sources of supply arrived, dropping the price to $300 an ounce. As a result, Ford had to write off $1 billion in trading losses. According to Bloomberg News Service, “Ford’s purchases in the face of a limited supply was a principal reason for palladium’s rise … then, after amassing enough palladium to last several years, Ford stopped buying, which played a role in the price collapse. Meantime, a technical breakthrough in catalyst design by Ford Engineers meant that less palladium would be needed than in the past.”
The net result of poor alignment of supply strategy and development is that companies can face higher supply costs, produce less innovative designs, and have longer cycle times than their competitors. Ultimately, this results in lost market share, lower margins, and for publicly traded organizations, lower multiples than their peers. But developing an understanding of the challenges that the wrong supply management strategy can bring is only the first hurdle in gaining a picture into supply risk. External factors—including market risk—are just as important as internal ones.
Curious? Drop Sydney a line (email@example.com) and we’ll send you out a copy of this dusty old analysis! Some topics are timeless. And supply risk is one of them.
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