To minimize and mitigate supply chain risks, companies need to engage their suppliers as partners. This means creating transparent relationships in which suppliers can share negative information without fear of being punished. The underlying dynamics of the need to shift to proactive “pushing” of critical information by suppliers to manufacturers and away from the reactive “pulling” of information from suppliers by manufacturers. Companies must expect all suppliers to have skin in the game and require them to identify and keep them informed of potential risks.
Companies of all types have been affected by pandemic-related supply chain disruptions, but many of the operational challenges they’ve faced over the past 18 months were magnified by the pandemic, not caused by it. Those problems reflect a longstanding and fundamental shortcoming in how companies’ relationships with their product and component suppliers are structured. Even in the absence of black swan events, manufacturers will continue to be at risk until they establish new ways to work with suppliers that ensure full transparency regarding the sources, availability, and life cycles of their mission-critical products and components.
Most companies understand how supply chain transparency can affect their ability to manufacture and deliver products. Very few, however, apply a disciplined process that requires suppliers to make important product and supply chain information available to them. Instead, they either passively wait for critical information to be provided or attempt to gather and manage those insights on their own, lacking the depth or details that only suppliers can provide. As a result, companies often react to negative events rather than plan for them. They place too much emphasis on the cost of essential products or components and pay too little attention to their inherent supply chain risks.
My firm’s experience suggests that companies rarely share risk-related concerns with their suppliers, may not even know where their suppliers should look for risk, and are often more concerned with penalties for — rather than the root causes of — missed delivery deadlines. Requests for quotes from suppliers are focused on price and lead times and fail to require information on regional trade and other compliance-related issues, product obsolescence, sustainability, or related concerns such as the manufacturer’s commitment to ethical supply chain practices.
In the current manufacturing environment — where no clear standards exist for what is and what is not acceptable supply chain risk — relationships need to be developed that define and formally align the interests of the purchaser and the supplier. Investment of time and resources are required to establish that type of high-level, non-transactional support from suppliers. Those relationships must also be based on trust, so that suppliers are comfortable sharing potentially negative information with customers.
For meaningful change to occur in the management of supply chain risks, the underlying dynamics of the company-supplier relationship need to shift to proactive “pushing” of critical information by suppliers to manufacturers and away from the reactive “pulling” of information from suppliers by manufacturers. Companies must expect all suppliers to have skin in the game and require them to identify and keep them informed of potential risks.
Attempting to reorder any unwritten, accepted industry practice or to establish a new protocol is always a challenge. From the outset, your company must believe that the end benefits of supplier partnerships based on full transparency will far outweigh the difficulties involved in managing the change process. You must be prepared to do whatever it takes to succeed and communicate that strong sense of purpose. Here are some lessons we’ve learned about how to establish such a dynamic.
Set a Constructive Tone
Your suppliers must understand that supply chain risk management is a priority. Your company relies on them for critical information, and you are determined to establish a formal system based on transparency and accountability. The shared goal is to create a clear pathway for the supplier to communicate supply chain risks that your company can address in advance of a problem. It’s not about placing blame after a negative event has occurred.
To ensure that risk management remains top of mind and to monitor changing conditions, some companies we work with maintain regularly scheduled calls with their strategic suppliers, and the call notes are shared broadly with key internal stakeholders. These calls also incentivize suppliers to make decisions based on the identified risks and help to avoid stock-out situations and other unanticipated problems.
Begin at the Design Phase
Consult with your suppliers at the product design and specification stages so that supply chain resiliency can be established at the outset. Response to a detailed checklist of risk factors and related responsibilities should be required of suppliers with every quote they submit (see the exhibit “A Checklist of Supply Chain Risk Factors”). This gives your company the option to assume, share, reject, or modify those risks. The risk factors can include country of origin of the individual components of the part or system in question, product end-of-life dates, and how long your supplier has partnered with the manufacturer of specific components in the part or system.
Identifying risk requirements in requests for quotes (RFQs) or master service agreements also enables your procurement team to consider risk factors when evaluating proposals. If your product engineers and other upstream decision-makers are made aware of supply-chain-risk issues in advance, they can avoid high-risk specifications when they design the offering.
Anticipate Supplier Pushback
Providing details on supply chain risks takes effort as well as a deeper understanding of the customer’s requirements beyond product specs, lead time, and pricing. Some suppliers may push back not only because of the additional administrative burden but also out of concerns about potential legal liabilities for failure to inform clients of risks. Those obstacles can be mitigated during negotiations by demonstrating a willingness to establish deeper, long-term relationships with suppliers in exchange for true risk-management partnerships.
Apply Leverage If Necessary
Most suppliers will understand the implications of their refusing to cooperate with a customer’s request for transparency. Strong-arm tactics may be counterproductive, but if necessary, you should be prepared to award business based on a supplier’s cooperation in providing necessary information. In addition, when reviewing a supplier’s performance, its ability to consistently deliver accurate supply-chain-risk data should be weighted as heavily as on-time delivery and cost control.
Ensure That Information Is Applied
Information from suppliers — including risk factors for specific components, end-of-life notifications, and details on potential supply chain disruptions — needs to reach your company’s product and engineering teams in a timely manner. For example, your product development team may eliminate certain components simply because they are more costly without knowing or taking into consideration their significantly lower supply chain risk.
A large medical device company with a transparent risk management process discovered that a low-cost power adapter used in one of its most profitable devices was manufactured by a single company in China and could not be replaced with any other available adapter. Rather than accepting those performance and brand reputation risks, the company re-engineered the device to accommodate a broader range of power adapters.
In addition, your suppliers must be given access to the internal personnel who can provide them with detailed specification guidance and can authorize approval of supplier recommendations that address potential risks.
Establish a System for Evaluating and Mitigating Risks
Given the high stakes involved — financial, operational, and reputational — your company cannot rely solely on supplier transparency to minimize risk. Even with well-structured agreements from cooperative suppliers, the potential for information gaps and unanticipated supply chain events will remain. For example, people at your company may not have communicated the critical nature of a component properly to a supplier. And unanticipated disruptions — such as those that occurred when a giant cargo ship got stuck last March in the Suez Canal — can never be forecast. For that reason, companies should establish a rigorous, data-driven internal process for evaluating supply chain risks and a risk mitigation protocol that’s endorsed and closely monitored by senior management.
Which Kind of Company Are you?
The significant supply chain disruptions that have occurred in the past 18 months are likely to affect manufacturers in one of two ways. Some companies will view them as a wake-up call to reexamine and strengthen their current risk management practices. Others will conclude that the likelihood of a similar event occurring in the foreseeable future is so remote that they can afford to take no additional steps to manage risk. The latter is a huge mistake.
Rolling the dice is not a risk management strategy. As the global supply chain grows more interconnected and complex, the impact of climate change expands, and geopolitical tensions and trade restrictions increase, the likelihood of disruptions is bound to increase. Companies must plan accordingly. Those plans should include revamping how you select and work with suppliers to ensure greater transparency, sharing of risk, and supply chain sustainability.
Copyright 2021 Harvard Business School Publishing Corporation. Distributed by The New York Times Syndicate.