This post is based on the following FreeMarkets white paper (published in 2003) that I co-authored with 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, “market risk” is one of five drivers of supply risk we identified in this paper originally. The others are strategy risk (reference here and here), demand risk, implementation risk, and performance risk. Enjoy!
The following case example highlights some of the risks that come along with implementing new suppliers:
The CEO of a large manufacturing organization mandated that their sourcing organization seek out new, low-cost sources of global supply. In one of their early online sourcing projects, the organization identified a Chinese supplier who could supply a $10 million annual contract for metal stampings at an 18 percent discount off of historic cost. The sourcing organization and the executive team were ecstatic.
But then the bottleneck hit. For the first six months, the organization did not introduce a project manager for this new supplier adoption opportunity. Why? Resources were fully deployed on other efforts or were casualties of recent downsizing. Eventually the plant manager began asking why he was not seeing savings in his P&L from the online sourcing activity. Finally, six months after the project, the implementation process began with a part-time project manager. While the manager had positive intentions, he did not cross functions efficiently.
For example, he didn’t work with the manufacturing and product engineers to compare drawings to the current as-built configuration of the part, or check on recommendations made by the previous supplier. As a result, the new supplier had to remake the tooling twice to accommodate changes, which ultimately slowed the production process.
Because the implementation manager was so concerned with the day-to-day trials of implementing this new global supplier and had not done this type of activity before, he failed to develop a project plan to drive milestones and dates. In addition, insufficient collaboration between suppliers and the sourcing organization were slowing progress.
Phone calls only confused issues, and marking up and mailing paper copies around the world wasted days—sometimes weeks—at a time. In addition, since neither organization had visibility into implementation delays, it became impossible to proactively create quick fixes to the issues at hand.
As a result, progress is only starting to be realized after nine months. And the implementation isn’t expected to be complete for another three months. Those time delays have cost the buying organization nearly $2 million dollars in savings, and created additional costs as well—potentially impacting supply and hurting the top line. Because of changing market conditions and the delayed implementation, the supplier has now asked for a three percent increase to cover the rising cost of raw metal materials.
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: