The greatest risks to your supply chain are your choices—especially how you treat your supply chain partners. This does not obviate doing risk assessment exercises and trying to anticipate other sorts of supply chain disruptions, yet too many companies underestimate how many company misfortunes result from getting exactly what they asked for.
Here are the three most common risks that companies create for themselves often without realizing, illustrated with examples from the automotive industry.
1. Perverse Incentives: You get what you pay for—and that isn’t always a good thing. Take the example of Takata airbags. Originally a manufacturer of seatbelts, Takata’s fortunes rose with those of Honda and other Japanese car manufacturers in the 1960’s and 1970’s. As the years went on, Takata’s customers exerted tremendous pressure to cut costs. The one substance everyone avoided in airbags was ammonium nitrate – a 10th of the cost, but inherently unstable. Takata started using it in 2001. The result is the largest and most complex automotive recall in history. Make sure you understand the cost structure for key supplier inputs, be realistic about expectations, and don’t go along with something “too good to be true” until you take the time to understand it.
2. Systemic Failures: It is easy to “armchair quarterback” Takata putting a small bomb in place of airbags in 1 in 5 cars in the US—a total of 60 million airbags in over two dozen brands. But this is like blaming your favorite child caught for being caught with his hand in the cookie jar—sure he did it, but his older siblings put him up to it. The huge asymmetry in power between automotive suppliers and manufacturers is embedded in industry practices, as indicated by the growth in automotive recalls over the past two decades. Renault refused to buy the Takata airbags without clear-cut evidence of the safety of ammonium nitrate, and this led to Takata’s European operations finding an alternative substance. Be sure to set strategic performance goals, and empower key people to pursue those goals even at the expense of short-term profits.
3. Failing to Consider Joint Outcomes: Do you consider outcomes just for yourself, or do you also assess results for your supplier or customer? The question not voiced often enough when supply chain disruptions occur is whether supply chain partners have each other’s best interests at heart. An excellent exercise that could be conducted is the “ideal solution simulation”—research the characteristics of all the strongest available suppliers, and then make up a mock company/product that has the best of each of these traits. Based upon how close your supplier is to the ideal, you now have the data indicating areas for potential improvement, and you have clearly identified to the supplier what to improve. This is the starting point for deeper conversations about how you can each benefit from your relationship.
It’s time for supply chain risk management to go beyond finding who to blame and what to avoid—both problematic approaches because they generate costs without adding value, and too often depend upon the assumption that companies have more control over their environments than is actually the case. Smart supply chain managers acknowledge their reliance on outside actors, and think in terms of the ability and willingness of supply chain “family” members to watch out for their interests, and to help to adapt and overcome during the hard times.
Michael Gravier is an associate professor of Marketing and Global Supply Chain Management at Bryant University with a focus on logistics, supply chain management and strategy and international trade. Follow him on Twitter at @Michael_Gravier. Follow Bryant University on Facebook and Twitter.