The game of risk: keeping supplier risk at bay

What steps can you take to avoid supply risk? Be methodical and be proactive. Segment the supply base for risk. And look beyond just the obvious categories. First, look at all types of suppliers who have risk potential, depending on your type of business, such as: direct material suppliers, suppliers providing important services, and transportation suppliers. Often companies look only at the big dollar volume items. But this can be short-sighted.  As evidenced by the now infamous fastener shortage at Boeing, a small-dollar-value part can stop a manufacturing line. And worse, it is an example of outsourcing run amok in the machinist strike at Boeing.  However, not all risks lie in direct materials. For example, if disruption of transportation is a critical risk, then look at 3rd party logistics and carriers. Or if loss of intellectual property is a risk, identify the most likely segment of suppliers. Examples are by geographic location – countries where IP protection is weak or by type of supplier, such as suppliers who help develop products or information technology. If you are using single sourcing, look at the categories where you are using single source suppliers and assess the potential risk from those suppliers and whether you need to find backup sources. Another potential area of risk may be just-in-time deliveries using kanbans. This does not mean that you need to rush out and start stockpiling inventory. If your just-in-time suppliers have truly adopted lean practices, they may be flexible enough to adapt to changing demand. Unexpected disruptions such as geopolitical and natural disasters are more worrisome, but not impossible to plan for. Lean suppliers – and all strategic and critical suppliers – should have risk and business continuity plans in place.  But you may need to review the tradeoffs between supply disruption and using additional sources or carrying additional inventory.

Some additional sources of information include my book, Supplier Evaluation and Performance Excellence, and these excellent articles: “Coming to Grips with Supplier Risk” from the Supply Chain Management Review and the Marsh study, “Supply Chain Risk Management” (available by registration on the site).

Like many challenging areas of supply management, reducing and mitigating supply risk is not rocket science. It just takes a lot of planning, organizational discipline and hard work – which may be why supply risk is often in the talking and not the action stage in many companies.

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