Friday Rant: Rising to the Multitier Challenge — Digging Into What Our Suppliers Buy (Part 1)

Undoubtedly, the recent headlines at many conferences and user events (not to mention the chatter amongst participants) have been highlighting the rise of supply chain risk as a general priority inside procurement, finance and operations organizations, large and small. I personally admit to pretty much flogging the topic to death on Spend Matters, but it's one I truly do care passionately about (thank you for indulging me, kind readers). But if you peel back the proverbial spend onion, a major component of rising supply chain risk is just a symptom of a broader malady -- which is actually quite simple to explain.

To wit, we simply don't know enough about what our suppliers buy and whom they do business with. When it comes to multi-tier supplier management and visibility, many of us are operating at least partially -- if not completely -- blind. And this is something we all must think about prioritizing as much as areas such as targeting rising commodity prices, year-over-year cost reduction programs and the like. Moreover, fix the multi-tier visibility problem and you'll address not only a range of supply chain risk challenges and areas, but also gain a new means of reducing costs, potentially far more effectively than going after supplier rationalization and strategic sourcing initiatives focused solely on the first tier of suppliers.

In our research examining multi-tier supply chains, we generally see two areas that we fail to focus on when turning our priority away from the extended spend picture: what we term "micro" and "macro" multi-tier challenges and opportunities. For the sake of simplicity in the remaining part of this analysis, we'll refer to multi-tier micro areas/analysis as "MT-Micro" and multi-tier macro areas/analysis as "MT-Macro." Similar to micro/macro economics, the former (MT-Micro) relates primarily to the analysis of individual suppliers and specific business decisions and choices pertaining to engaging, negotiating, ordering from and developing a particular vendor or a smaller group. The latter (MT-Macro) is about broader decisions impacting more than one supplier, plus it forces acting suppliers outside of a vendors' direct control (e.g., policy, geography).

The analysis of both areas is critical to understanding the multi-tier challenge and opportunity of broader supplier engagement that goes beyond spending nearly all of our time focusing on tier-one issues. It's our belief at Spend Matters that while supply chain risk management may have opened the door to the multi-tier question -- on some levels as supplier diversity did within the US in certain industries where multi-tier spend tracking and reporting is required -- that a failure to explore and understand both elements within an individual supply chain will cause broader efforts to come up short.

There can be overlap between MT-Micro and MT-Macro issues. For example, look at traceability within the supply chain, where there are specific MT-Micro issues we need to care about, such as the potential for conflict metals being used by specific suppliers lower in our supply chains that ultimately roll up to a component or product we provide containing a bill of material that uses raw or semi-finished materials from sources lower down. But on the MT-Macro side, we must also concern ourselves with the prospect of traceability pertaining to broader issues such as rare earth metal exposure (based on potential capacity or regionally constrained markets) and rival countries such as China embedding code or other malicious devices within certain supply chain parts (e.g., A&D) that might report back on activity, or worse.

Other types of MT-Micro issues include monitoring for lower-tier supplier financial (e.g., balance sheet health) and operational (e.g., quality, on-timer performance, etc.) supply chain issues. It's important to note that even within these sub-areas, different elements are not mutually exclusive. For example, operational risk factors may be indicators of tier two, three or lower supplier financial stability as well. However, it is possible to segment and look at some of these areas in isolation as part of a first step toward multi-tier visibility.

One such area that can stand alone and should garner particular attention in the wake of the Japanese earthquake/tsunami tragedy and early belches from a newly active ash-cloud-generating and air-freight threatening volcano in Iceland is geographic concentration/locations of lower-tier suppliers. In China especially this is a critical concern, given the number of lower-tier supply markets that are now much more concentrated than before in different Chinese and Asian supply markets.

Stay tuned as we continue to explore this topic next Friday, diving into MT-Macro issues and the types of areas and programs we can target successfully once we have visibility into our multi-tier supply chain.

Jason Busch

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