In an era marked by unprecedented challenges, it’s imperative for companies, especially those with ample budgets and resources, to intensify their efforts in bolstering supply chain resilience. This includes delving deep into the potential risks associated with tier 2, 3, and 4 suppliers. The path to a robust supply chain begins with a thorough mapping of the entire network, enabling businesses to pinpoint every supplier and subsequently engage them in comprehensive assessments. These evaluations are crucial in determining the areas that require immediate focus and improvement.
A pivotal aspect of strengthening supply chains lies in assisting suppliers to adhere to compliance standards. This support can manifest in various forms: from being a reliable and responsible customer to offering financial assistance during challenging periods. Such strategies not only ensure the stability of key partners but also fortify the entire supply chain network.
The fragility of global supply chains came into sharp focus with the Suez Canal incident in March. The Ever Given, a colossal container ship, became lodged in the canal, causing widespread disruptions. This incident, which required a six-day, round-the-clock salvage operation, underscored the vulnerability of these intricate networks, through which 12% of the world’s trade flows.
Supply chains had already seeped into everyday conversations, beginning with product shortages during the early pandemic days and evolving into the ongoing microchip scarcity that has hindered new car production. These challenges underscore the need for businesses to proactively identify and manage potential risks to stay ahead of future disruptions. While it’s impossible to anticipate every scenario, companies with greater resources can implement strategic measures to mitigate these risks effectively.
Consider the contrasting responses to the chip shortage by Ford and Toyota. Ford announced a significant reduction in its car production for the second quarter of 2021, foreseeing a drop in annual production by over a million vehicles due to the chip crisis. In stark contrast, Toyota, having learned from the 2011 tsunami, had strategically stockpiled a four-month supply of semiconductors. This foresight left Toyota relatively unaffected by a crisis projected to cost the automotive industry $60 billion, as reported by Bloomberg. Toyota’s proactive approach highlights the importance of strategic planning and risk management in supply chain resilience.
Ford’s predicament serves as a cautionary tale, illustrating how supply chain disruptions can severely impact revenue, customer relationships, and long-term reputation. Consequently, the lens through which companies view their supply chains and the inherent risks has expanded significantly. While many large corporations already had some form of supply chain resilience strategy in place, the pandemic has necessitated a reevaluation and enhancement of these measures.
In this comprehensive exploration, we delve into the reasons why enterprises must recognize the risks posed by upstream suppliers. We’ll also discuss how businesses can uncover, assess, and manage these risks effectively, and the technological solutions that can facilitate this complex process. This article aims to provide a roadmap for enterprises seeking to navigate the intricate and ever-evolving landscape of supply chain management in a proactive and strategic manner.
Exploring the Depths of Supply Chain Management: The Hidden Risks and Strategies for Transparency
In the intricate web of modern supply chains, established companies are generally adept at managing the risks posed by their direct, or tier 1, suppliers. These risks encompass economic, environmental, political, and ethical dimensions. To mitigate these, businesses have often resorted to diversifying their supplier base or severing ties with high-risk partners. However, this traditional focus on immediate suppliers is no longer adequate in today’s complex global market.
The concept of supply chain resilience has evolved, extending its reach to include the risks emanating from second, third, and even fourth-tier suppliers. These entities, which supply to a company’s direct suppliers, often remain concealed from the end-product companies. The prevailing assumption has been a cascading management model, where each tier is responsible for regulating its direct suppliers. However, recent developments and incidents have shown that this model is insufficient for contemporary supply chain dynamics.
Steven Melnyk, a professor of supply chain management at Michigan State University, emphasizes the need for an expansive approach: “Now you’ve got to work across your supply chain,” he asserts. “This involves engaging with suppliers at all tiers, a departure from the traditional strategies focused primarily on first-tier interactions.”
Numerous incidents highlight the perils of neglecting upstream supply chain due diligence. A notable example is the 2016 investigation by The Guardian, which linked prominent car manufacturers such as Vauxhall, BMW, Volkswagen, and Audi to an Indian mica mine employing children under harsh conditions. This mica, after several transactions, was used in the manufacturers’ car paint. A similar issue arose nearly a decade earlier when Mattel had to recall almost a million toys due to lead paint used by a Chinese supplier.
Emerging regulations are set to intensify the repercussions of these oversight lapses. The European Union is formulating legislation obligating businesses to conduct thorough due diligence across their entire supply chain. This legislation aims to prevent human rights violations, environmental breaches, and corruption. For instance, if a company’s fourth-tier supplier is found complicit in corrupt practices, the company could face significant fines under EU law.
Similarly, the United States-Mexico-Canada Agreement (USMCA), which became effective recently, imposes specific labor standards on businesses operating in or sourcing from these nations. These standards include the right to collective bargaining, the prohibition of forced and child labor, and non-discrimination in employment.
The challenge lies in the lack of visibility into these extended supply networks. A 2020 Deloitte survey revealed that 90% of chief procurement officers admitted to having “very low to moderate visibility” into their tier 2 suppliers and beyond. Even visibility into tier 1 suppliers is not comprehensive, with only half of the respondents claiming “high or very high visibility”.
Given these complexities, how can organizations achieve the necessary transparency to ensure compliance and mitigate risks across all tiers of their supply chain? This question underscores the need for a more sophisticated and holistic approach to supply chain management, one that extends beyond traditional models and incorporates advanced strategies for deeper visibility and control.
Comprehensive Supplier Network Mapping for Effective Risk Identification
A pivotal strategy in contemporary supply chain management is the comprehensive mapping of supplier networks. The more detailed this mapping extends, encompassing every node down to the raw material level, the more effective it is in identifying potential risks. Jim Yarbrough, a global intelligence program manager at BSI Group, underscores the significance of this approach, especially in sensitive industries like pharmaceuticals or food production, where traceability is paramount.
The process of mapping a supplier network is not a solitary endeavor but a collaborative one. Yarbrough points out that in larger organizations, various departments often interact with different sets of vendors, leading to divergent perceptions about the constituents of the supply chain. For companies with an extensive network of suppliers – say, upwards of 20 or 30 – the complexity increases manifold. It is in such scenarios that supply chain mapping software becomes an invaluable tool.
These sophisticated systems enable businesses to categorize suppliers as primary or backup sources for specific materials or goods. Users can organize this information based on several criteria, such as compliance scores or overall threat ratings. A major advantage of digital mapping is its dynamic nature; as suppliers are added or removed, the map can be updated accordingly without the need to overhaul the entire network. This feature is particularly useful for stakeholders outside the procurement department, helping them stay informed about any changes without direct daily management of these contracts.
Following the completion of the mapping process, the next step involves a thorough assessment of the risks posed by each entity within this network. Various methodologies exist to rate supplier risks, which have been explored in depth in our previous discussions on identifying and mitigating supply chain risks.
Supplier assessments form a critical component of understanding the specific threats posed by vendors at each supply chain tier. Typically, this assessment takes the shape of a detailed questionnaire distributed to select or all partners. These questionnaires can range widely in scope, from 100 to 2,000 questions, focusing on industry best practices as noted by Yarbrough. Besides responding to these inquiries, suppliers are also required to furnish evidence of their compliance, such as relevant documents, into the assessing company’s system.
The insights gleaned from these assessments can expose various risks, including high crime rates, substandard working conditions, or ineffective regulatory enforcement. Operational leaders can leverage this information to prioritize their focus areas. Subsequently, they can consider the following strategies to determine the most effective means of supporting their partners in mitigating these risks.
Empowering Your Suppliers: A Strategic Approach to Building Stronger Partnerships
Elevating supplier capabilities is an essential strategy for businesses looking to mitigate risks and foster enduring relationships. When suppliers are supported in overcoming their weaknesses, it not only safeguards your business but also bolsters the supplier-customer relationship. In times of crisis, suppliers often prioritize clients who have demonstrated a genuine commitment to the partnership.
Although finding new vendors is an option, it brings its own set of challenges. To navigate this landscape, consider the following strategies:
- Implementing Compliance Standards: Merely suggesting improvements to vendors is insufficient. They often require guidance and support to implement these changes effectively. Organizations like BSI (British Standards Institution) have developed comprehensive standards in critical areas such as supply chain security, business continuity, and risk management. These standards, formulated by committees comprising experts from various sectors, entail both recommendations and requirements. For instance, the business continuity management standard mandates alignment of business continuity policies with strategic objectives, a well-defined action plan, and regular reviews.Companies can encourage their suppliers to align with standards from entities like BSI or ISO (International Organization for Standardization). This process might involve a gap assessment to identify areas for improvement, possibly leading to certification by these bodies. Suppliers, recognizing the potential to enhance their appeal to other clients, are generally receptive to this cooperation. However, this process often necessitates external consultancy, a cost that your company might need to bear.
- Lending Expertise: In many cases, your organization possesses skills or knowledge that could greatly benefit your suppliers, especially smaller ones. Melnyk cites an example of a supplier seeking cybersecurity software, with the customer recommending vetted vendors. Alternatively, a larger company could provide access to its legal team to assist a supplier with contract writing and other documentation, thereby reducing their operational burdens.
- Offering Financial Support: During challenging times, like the recent pandemic, some companies have extended financial support to their suppliers. This support can take various forms, such as prepaying for future orders to facilitate immediate cash flow. According to a report by ASCM and The Economist Intelligence Unit, about 80% of large consumer electronics companies provide financial aid to suppliers during crises. While not feasible for every business, this gesture can significantly strengthen the supplier-customer bond.“Once you help them, they become part of your company,” explains Joe Sarkis, a professor of supply chain management at Worcester Polytechnic Institute. “It’s not full vertical integration, but it cultivates loyalty, making them more inclined to support you in times of crisis.”
- Understanding What Matters: Melnyk’s survey of 1,300 suppliers to a U.S. military branch revealed that the defining characteristics of a “good” customer include mutual trust and respect, profitability, joint problem-solving, straightforward RFQs, and timely contract awards. These traits emphasize the importance of responsive communication and the overall nature of interactions. Thus, being a favored customer transcends mere financial transactions.
The evolution of supplier relationships into strategic partnerships is gaining momentum. ASCM notes that “greater collaboration with external supply chain partners” is a key focus for businesses aiming to enhance resilience.
Yarbrough observes a significant maturation in how organizations engage with their suppliers compared to a decade ago. “You’re getting really savvy supply chains now; you’re getting people understanding, ‘I need to develop that relationship; I need to make them understand why this is so important to us,’” he notes. This shift towards more meaningful, collaborative relationships marks a pivotal development in modern supply chain management.
Navigating Limited Diversification in Supply Chains: Innovative Strategies
Diversifying the supply chain by sourcing crucial components from multiple suppliers across different regions is a standard approach to risk mitigation. This strategy ensures that regional disruptions don’t incapacitate your entire supply network. However, this isn’t always feasible. Certain materials or components may be exclusive to specific geographic areas, or alternative sourcing may be prohibitively expensive. Unique resources like Carrara marble from Italy or silk predominantly from China and India exemplify such challenges. In such cases, where geographic diversification is limited and redundant local suppliers provide only marginal risk reduction, businesses must explore alternative strategies.
- Increasing Inventory of Hard-to-Source Materials: The most straightforward approach in this scenario is to maintain a larger inventory of these specialized materials. This strategy provides a buffer against supply disruptions but requires additional storage and capital investment.
- Seeking Alternative Materials or Reengineering Products: Another avenue is exploring alternative materials or components that offer similar properties or functionalities. Additionally, companies could consider reengineering their products to eliminate the need for these hard-to-source components. Peter Bolstorff, EVP at ASCM, notes that while these options are not quick fixes and necessitate significant R&D efforts, they are viable for businesses with the necessary resources and are worth exploring in the long term.
- Repurposing Used Materials: A more innovative and sustainable solution is the repurposing of existing materials. Joe Sarkis, a supply chain management expert, suggests that companies explore “mining” their waste streams for reusable materials. This approach not only reduces dependence on scarce resources but also aligns with sustainable and eco-friendly practices. While initially, it might seem more cost-effective to source new materials, the long-term risk and resilience factors favor a recycling and reuse strategy.
- Embracing the Circular Supply Chain Model: This concept involves repurposing items at the end of their life cycle instead of disposing of them in landfills. The circular supply chain is an emerging trend that promises to reshape future supply chain strategies. It focuses on sustainability and resilience, turning waste into a resource and thereby reducing dependence on limited or risky supply sources.
While these strategies may require a shift in traditional supply chain operations and potentially involve significant investment, they offer viable solutions to the challenges posed by limited diversification. In adopting these approaches, companies not only mitigate supply chain risks but also contribute to sustainable and resilient business practices, aligning with modern environmental and ethical standards.
Recognizing the Influence and Potential of Suppliers in Business Relationships
In the realm of business, especially among larger corporations, there’s a common presumption that as the customer, the company invariably dictates the terms of its relationships with suppliers. This assumption, rooted in the notion that monetary transactions confer control, often overlooks the nuanced dynamics of supplier relationships.
The expectation of “compliance-driven behavior,” where suppliers are expected to conform to the demands of the purchasing company, is not always the most effective strategy. For instance, not all suppliers may agree to adhere to previously mentioned compliance standards. Top-tier suppliers, especially those offering unique products or services, usually have a selection of clients to choose from. This becomes particularly critical when dealing with suppliers who are difficult to replace.
Steven Melnyk, a supply chain expert, highlights a common oversight in supplier evaluation: “Most of the time when we look at critical suppliers, we look at how much we buy from them. We don’t often consider how easily they can be replaced if they were to leave.”
This dynamic is evident in government procurement. Agencies typically have extensive requirements for suppliers, leading to significant shrinkage in the supplier base despite increased budgets. For example, Melnyk points out that the U.S. Department of Defense’s supplier base decreased by 27% while its budget grew by 39%. The burdensome cost of compliance often leads suppliers to conclude that the partnership is not worth the effort.
Business leaders should recognize that suppliers have the agency to decline partnerships. Maintaining good standing with suppliers offers tangible business advantages. The annual Supplier Working Relations Index (WRI) from Plante Moran, surveying over 500 tier 1 suppliers to major automakers, consistently ranks Toyota and Honda at the top. This index shows that strong working relationships reduce operational costs, enhance efficiency, and shorten time to market.
Beyond cost savings, strong supplier relationships are crucial for gaining insights into the deeper tiers of the supply chain. As companies strive for clarity on their tier 2, 3, and 4 suppliers, they often need to collaborate with their tier 1 and 2 partners. These partners are more likely to facilitate connections to their own suppliers if they feel valued and respected.
Moreover, suppliers can serve as an invaluable early-warning system for potential disruptions, given their broad customer base and market exposure. They may detect emerging issues before they become apparent to their clients.
Melnyk emphasizes a shift in perspective: “It’s no longer just about investing in risk management like an insurance policy. It’s about rethinking supply chains and focusing on relationships.” He notes that the skills companies developed to navigate the pandemic — building strong supplier relationships and collaborative problem-solving — are the same skills essential for managing risk and enhancing resilience. This approach marks a significant paradigm shift in supply chain management, underscoring the importance of mutually beneficial and respectful relationships with suppliers.
Evolving Supply Chain Management with Advanced Control Towers
The global economy’s supply chains have long been anchored in technological advancements. The types and capabilities of the software and hardware facilitating supply chain operations continue to evolve rapidly, particularly with the increasing volume of data generated from various supply chain processes like receipt, production, and delivery.
This surge in data has given rise to the concept of a supply chain control tower. A control tower functions as a central hub, integrating information from diverse supply chain systems — including procurement, manufacturing, inventory management, order management, and warehouse management. It provides a comprehensive, real-time overview of the supply-demand landscape, highlighting key performance indicators (KPIs) and critical updates.
Tony Nuzio, founder and CEO of ICC Logistics Services, illustrates the utility of a control tower: “It enables real-time tracking of operations. For instance, if a supplier in Qingdao can only produce 20,000 widgets weekly instead of the anticipated 40,000, this discrepancy is immediately apparent. The sales team can swiftly respond to this challenge, perhaps by coordinating with alternative providers to prevent stock shortages.”
Increasingly, businesses recognize the significant impact supplier issues can have on their bottom line. There’s a growing interest in accessing partners’ systems for the latest information. For example, early detection of a supplier falling behind schedule can allow enough time to engage an alternate supplier, avoiding stockouts. While over half of the respondents in an ASCM survey currently base supply and demand estimates on internal data, a tighter integration with supplier systems is likely to become more prevalent.
Chris Nicholson, CEO of Pathmind, a company applying AI to industrial operations, predicts a shift in contractual requirements: “We’re going to see contracts demanding more granular data from suppliers up the chain, with continuous monitoring and access to historical performance, especially under adverse conditions.”
The integration of Internet of Things (IoT) devices in supply chains is another growing trend. For example, vehicle tracking devices can pinpoint the location of trucks en route to warehouses or check dock availability for unloading. RFID tags on pallets can confirm whether a retail partner has received its shipment. All this data feeds into the control tower, enriching it with detailed, moment-to-moment insights into the enterprise’s extensive network.
In summary, the advancement of supply chain control towers represents a significant leap in the way enterprises manage and interact with their supply chains. By harnessing real-time data, advanced analytics, and IoT technologies, these control towers enable businesses to navigate the complexities of modern supply chains more effectively, enhancing operational efficiency and responsiveness to market dynamics.
The Transformative Impact of Global Challenges on Supply Chain Management
The pre-2020 era of supply chain management was characterized by a certain complacency, described by Tony Nuzio of ICC Logistics Services as being “fat, dumb and happy.” For decades, the strategy of outsourcing significant portions of supply chains to distant countries had proven cost-effective and largely successful. The opacity of tier 2 and 3 suppliers was a manageable concern, and organizations had adapted to the extended lead times inherent in such globalized operations.
However, the tumultuous events of 2020 marked a paradigm shift in this outlook, potentially altering the landscape of supply chain management permanently. The disruptions caused by the coronavirus pandemic, which led to the slowing down or halting of factory, warehouse, and port operations, have compelled businesses to reevaluate their supply chain strategies. The newfound focus is on identifying and mitigating risks with supply chain partners, along with exercising greater diligence in assessing potential new partners. This represents a logical and necessary progression in the evolution of supply chain management.
Steven Melnyk, a supply chain expert, underscores the urgency and necessity of this shift: “The pandemic, the chip shortage — these events have starkly highlighted the vulnerabilities in our current systems. The issues are now widely recognized, not just within management circles but also in mainstream media. If there was ever a time to initiate transformative changes in supply chain management, it is now.”
In essence, the challenges of 2020 and beyond have served as a wake-up call for businesses globally, underscoring the need for more resilient, transparent, and responsive supply chain systems. The value of these adaptations and improvements in supply chain management is likely to become increasingly evident as businesses navigate the post-pandemic world, striving for efficiency and sustainability in an ever-changing global market.