The Supplier Risk Link: Fix It Fast If It Breaks – or Do Planned Maintenance?
When it comes to managing supplier risk, even major companies are still shooting from the hip. Many have no visibility into the total risk along their supply chains. Quality issues can lead to product recalls. Interruption of supply can erode market share, cut operating margin and increase expedited freight charges to name a few. All of these challenges and many more are rooted in problems at the supplier level. Even among companies taking a more disciplined approach, two different paths are emerging. Some are using well established approaches to help predict and stay ahead of risks. Others are choosing to master the art of rapid response. Which approach makes the most sense?
Here’s the debate:
Monitoring and mitigation are essential
|Everybody knows getting ahead of risk is smart. The earlier you see risks, the more options you have for managing them.||You can’t anticipate everything, so don’t waste time and money trying. How well you handle threats when they occur is more important.|
|Supplier risk is the supplier’s responsibility. You have your own business to run.||A supplier’s problem is your problem. Your customers will let you know this by pulling their orders. After all, it’s your product or service they’re buying.|
|Actively managing supplier risk reduces variability and cost – and improves service quality. It also leads to deep supply chain visibility. What’s not to like?||A proactive approach would require talent and resources we don’t have. Right now, we can’t afford the necessary hiring, training and investment.|
|Fix it fast
Speed and flexibility are key
|Big risks don’t happen out of nowhere. Just pay attention closely and be ready to react.||Sometimes rapid response just isn’t rapid enough. Risks can come without warning or cascade. Monitoring and modeling help you stay in front of the problem.|
|This is how we do it and it works. We know the major risks and how to respond because we’ve done it before.||Customer expectations are rising and your competitors are stepping up. Also, the business environment is increasingly global and complex. You can’t afford to stand still.|
|Our supply footprint is too big to manage. It’s also in a state of flux. Until things are simplified, rapid response is the smart approach.||That’s exactly why monitoring and mitigation are needed. There will be a ton of decisions ahead. Go in knowing where the risks are.|
Jerry O'Dwyer, Principal, Deloitte Consulting LLP
The more efficient your supply chain and the more global your company, the more supplier risk you’re facing. The question is how to manage that risk in a world where anything can change on a given day. For some companies, certain kinds of disruptions come with such a high cost that the benefits of proactive monitoring are clear as a bell. That’s easier with a smaller number of critical suppliers – and almost always worth the investment. It has the added value of helping you understand their businesses better. In supply chains with tens of thousands of suppliers, monitoring, modeling and mitigation are trickier, but maybe even more important. That’s partly because risks can cascade. Being able to mount a smart and rapid response to threats can help prevent them from spiraling out of control.
The companies I work with are trying to choose between getting ahead of risk and mastering the art of rapid response. Both are equally challenging. And, in some cases, it makes sense to do both. Here are some ways to think about the choices:
- Start by looking at other industries. A quick look at the practices and models that other companies are using to manage supplier risk doesn’t take much time or effort and often reveals some immediate ways for you to improve.
- Challenge your assumptions. A risk model is only as good as the assumptions it is built on. A disciplined framework for making assumptions is critical, especially when you’re dealing with a large supplier base.
- Weigh your overseas payback. Programs to buy from lower-cost suppliers are measured by the expectations you set. If quality, reliability and management cost exceeds savings, evaluate your options to stop, expand or balance with near-shore and local alternatives.
- Prioritize risk factors. The more suppliers you have, the harder it is to actively monitor risk on a company-by-company basis. That’s why it’s important to prioritize – identify and monitor specific indicators that will offer clues on where problems are likely to arise.
- Assign clear accountability. At best, some organizations achieve compliance; at worse, no one is at the helm. Look at how others are working with their supplier network to proactively manage risk together. Or take it back in-house to control your exposure.
The right approach to supplier risk management varies from one company to the next. However, one thing that holds true for every company is that supplier risk is simply too important to ignore.
A view from life sciences
Joseph Slota, Principal, Deloitte Consulting LLP
When supply chain disruptions can mean rescheduling a patient’s surgery or missing the window to get approved drugs to market, working ahead of the curve is critical. But it’s not just about shipping products uninterrupted. It’s also about delivering services, innovation and competitive advantage. Because if you’re not staying close to your suppliers – and their suppliers – it’s a safe bet your competitors are.
One of the hidden risks in life sciences is what I call “innovation avoidance.” That’s where companies fail to tap their suppliers for new product, packaging or other innovative ideas. A minority of the supplier portfolio is – and should be – recognized as strategic. Companies need to set criteria and identify their strategic suppliers. While a continual focus on cost reduction and lowest price with suppliers achieves a purpose, it shouldn’t preclude spotlighting and enabling key suppliers to collaborate. Using your supply chain for innovative ideation can be a major value-add; not using it at all is a major risk that sometimes goes unnoticed.
An even worse risk than innovation avoidance is emerging market product flow. In countries that lack robust controls, processes and regulation, suppliers can take your ideas to market as their own, sometimes illegally or without your knowledge. Also watch out for the so-called “boomerang effect” where suppliers compete with you back on your home turf. This can occur through formal or informal distribution channels, the latter including gray markets and counterfeits. To avoid or reduce this risk companies have used effective oversight for better visibility and control.
Major life sciences companies are increasingly focused on their core competencies. This means that they’re outsourcing all or part of their supply chain to third-party logistics companies. Through these arrangements, companies seek the supply chain flexibility needed for new product launches, lower cost structures or enhanced customer service. With these interdependencies, it’s even more crucial to monitor your supplier base for risk, keeping a finger on its pulse.
Make sure you’re not overly exposed to supplier risk when the economy turns around or next global health event hits, creating surge capacity requirements.
A view from consumer products
Adam Mussomeli, Principal, Deloitte Consulting LLP
Representing some of the most iconic brands in history, consumer products companies put their reputations on the line every day. Proactively managing all types of risk is crucial to deliver on the brand promise.
Given what’s at stake, consumer products companies have no choice but to be proactive when it comes to managing supplier risk. More advanced companies have started to develop supplier risk programs based on HACCP standards and continue to leverage practices such as third party audits. But they still lack the ability to analyze near-time information and identify and manage risks before they become management challenges.
With an early warning system in place you can more effectively anticipate possible responses and be better prepared. Setting up a prediction market is one way to do this. Participants buy and sell “shares” of suppliers by participating in an online futures market for risk. Companies in other sectors have already used internal markets successfully as a mechanism to allocate manufacturing capacity among factories, improve product sales forecasting and reduce plant greenhouse emissions.
Despite recent progress, many consumer products companies still struggle to pull together all the different strands of risk – and that’s where the most opportunity lies. Risk is generally managed on a function by function basis, even within the supply chain. Quality handles product quality risk. Material management addresses service risk. Procurement looks to supply security risk and commodity risk. They know all these activities are intimately connected, but haven’t taken a holistic cross-functional approach to establish risk governance at a higher level.
Bottom line? If you haven’t figured out a reliable way to predict and mitigate your overall supplier risk exposure, you may need to think again.
Library: Deloitte Debates
Overview: Strategy & Operations and Governance & Risk Management
Industries: Consumer Products, Process & Industrial Products, Life Sciences and Technology
Join the Debates
As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.