Supply Risk: Becoming Part of the Solution, Not the Problem

While in the midst of working with Jason on our session for the ISM International Supply Management Conference in April ( “Understanding and Choosing Supply Risk Solutions: Software, Content, and Analytics”), I began thinking about the implications of the business-practice side of the supply risk equation. While there are now many supply risk solutions available, one still needs to consider the impact of supplier management on supply risk

When it comes to supply risk, some supply managers and some firms are their own worst enemies, unintentionally causing problems for their suppliers. Sure, there are a lot of uncontrollable and unpredictable risks to worry about. But how many supply risks are self-induced?

Many assume that supply risks are caused by forces beyond the customer firm’s control: earthquakes, strikes, transportation problems, bankruptcies. But wait – let’s take supplier bankruptcies. Some companies such as Caterpillar, recently profiled in the Wall Street Journal and cited on Spend Matters as the epitome of savvy supply management and risk mitigation, facilitates bank credit to suppliers so that suppliers can buy inventory to make said customer’s product. Caterpillar also uses freeze periods or frozen zones to prevent changes to orders so as not to disrupt supplier production of Caterpillar products, and allow suppliers time to plan and get the financing they may need to produce the orders. On the other end of the supply management spectrum, I know one firm that measures on its supplier scorecard a supplier’s willingness to extend payment terms to 60 days or more, and dings the supplier's score if it is unwilling to comply with those terms. (It’s an all-too-common practice to help fund operations with the float from late payments to suppliers.) There's another firm that would routinely stop paying suppliers several months before the end of the fiscal year to make its own financials appear more favorable to Wall Street. This was done at the expense of many small family-owned firms, who became unable to meet their payrolls because they were waiting more than 90 days to get paid. The Director of Purchasing, with his marching orders from Corporate, had to deflect many tearful phone calls from suppliers who were going bankrupt. It was the going-out-of-business time of the year for the financially weaker suppliers. Given the current economic slump and severe fiscal pressures on suppliers, these practices are enough to give many suppliers the final push off the cliff.

If you thought all supply risks are caused by forces beyond the customer firm’s control, think again. Another area that falls into the self-inflicted-wounds school of supplier risk management is poor or ineffective communication, sometimes "accidentally on purpose." How about the company that handles its own excess inventory problems by simply closing the docks with no advance warning to suppliers? Delivery trucks with that customer’s parts pull up and get turned away. This occurs until the customer decides that it’s safe to let in more inventory that the customer ordered and did not cancel. Just close the docks. It’s a brutal, risky, and ineffective way to reduce inventory.

Another example of poor communication is sending incorrect orders to the supplier, then blaming the supplier for providing the wrong product or service. It’s waste, and it costs everyone money. Many companies wreak havoc by issuing less-than-lead-time orders, or cancelling orders at the last minute. No frozen zones for them, other than freezing suppliers out of business. While changing business conditions may lead to these practices, they nonetheless exacerbate supply risk.

It may sound like I’m being a vendor defender here, but I’m just trying to point out examples of how customer firms can create their own supply risks. While supply risk solutions may highlight the weak and risky suppliers, hopefully it’s not the company using the software that created the risk in the first place.

Sherry Gordon

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