Supply Risk at the Tier 2 Level and Below: Strategies to Contain and Reduce Exposure

We recently outlined some of the challenges (courtesy of a fabulous guest contribution by AIAG Executive Director, J. Scot Sharland, to Wards Automotive) of sub-tier supply risk in the automotive supply chain. Yet the challenges and solutions outlined by Sharland are not just applicable to the automotive sector. They are relevant across just about all industries, and especially relevant for A&D and other diversified manufacturers (since the lower tier supply chain is often shared across industries).

Before talking solutions, it’s important to note how acute the current situation is. Sharland writes that there are currently “volume constraints for specific parts and components, and we are beginning to see industry segments facing parts shortages, both for new vehicles and for replacement parts for older models.” Furthermore, as he observes, automotive sector quality practices (e.g., first article testing, PPAP, etc.) are stringent, making it costly in terms of both time and capital to qualify new and alternative supplier parts/components for a given production line.

Some of the recommendations Sharland makes in his article (which we recommend you read in its entirety) include exploring training and education across the entire supply chain, such as private/public sector partnerships aimed at expanding manufacturing skills and capacity. Given that the greatest new capacity is likely to come from southeastern states within the US and Mexico, Sharland writes that “local groups such as automotive manufacturing associations in Alabama, Georgia, Mississippi, and Tennessee, in addition to Mexico’s Industria Nacional de Autopartes (INA), will be critical to our success.”

We often jump to managing supply risk as a “data” and “analytical” challenge. The thinking goes, if we can predict whether a supplier will be in business based on looking at credit scores, balance sheets, and other factors, we can be successful in managing risk. But as Sharland emphasizes, what really matters is looking at the bigger picture of the broader supply chain and expanding the definition of supply risk to one of capacity, education, and skills development – at all tiers. And from these efforts come not only visibility and transparency, but also an insurance policy focused on creating the right environment for lower-tier suppliers to grow and thrive.

For further reading on risk management, download these free research papers:

Supplier Lifecycle Management: Reduce risk, Improve Performance and drive Supplier Value

Managing Supplier Risk in a Post-Recession Recession: Webinar Slides

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First Voice

  1. Brian Halpin:

    Great article, Jason. My first thoughts when considering multi-tier supply chain risk management, are ‘what?’, and ‘who?’ – as in do we have multi-tier visibility into what we are buying, and who is going to manage the process of identifying and managing those sub-tier suppliers? Since these responsibilities tend to fall squarely on procurement practitioners, I believe the answer is that we need to do a better job in collaborating with our tier 1s in not just analyzing and mitigating the supply risks that they present to our organizations, but in developing their own risk management processes so that they can manage and report on multi-tier risk. We also need to take a long, hard look at how our corporations are contributing to multi-tier risk with our procurement practices, and to ask ourselves what skin we are willing to put in the game to truly drive risk out. As we execute against our commitments to provide value to our corporation through total cost reduction, we are passing cost pressure backward through our supply chains. In so doing, each successive tier of the chain has less ability to absorb such price reductions without having to make zero-sum decisions about reinvestment in innovation, maintenance, and capacity. This means that we are ultimately weakening what Mr. Sharland calls “the manufacturing foundation that supports our industry”, in our drive to improve shareholder value. Some of the largest and healthiest corporations do invest in supplier development programs, or may provide supplier financing for capital improvement and expansion projects, but this is typically reserved for tier 1 suppliers that provide what they deem to be critical and proprietary goods. We all know that risk does not discriminate on these grounds, that disruptions to supposedly commoditized supply can shut down our factories just as effectively. So while I agree that providing the tier 2+ supply base with access to education and skills development is valuable, and can improve our visibility into the sources of risk, I also believe that we can only truly drive risk out of the system when the enterprise recognizes the quantitative value of risk reduction, disruption mitigation, and event avoidance on the same level that it values cost reduction.

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