The growing webs of suppliers and their subsuppliers have created greater complexity and risk in manufacturer-supplier relationships, which can result in a manufacturer having little to no notice that it is not able to meet a customer’s needs. To reduce their vulnerability, companies should take steps to build and support several elements that are crucial to resiliency in their supply chains.
The Importance of Insights to Suppliers
Ever-expanding supply chains make it difficult to maintain consistent and timely visibility with suppliers, which ultimately affect the close relationships manufacturers historically have had with their suppliers. In the past, companies had, at the very least, some familiarity with their suppliers, and in most cases, companies and their suppliers had strong working relationships.
Today’s supply chains, though, find companies further removed from their suppliers and a personal level of contact. Relationships increasingly are transaction-based and often focused primarily on cost, leaving relationship-based premiums severely diminished. As a result, companies might have lower costs, but they also have much less insight into the business of their suppliers, leaving them with little advance notice of signs of trouble that could affect them.
It’s not unusual these days for a manufacturer to lack a strong understanding of how a supplier conducts business, the supplier’s business environment, the subsuppliers the supplier relies on, and other relevant information. Consequently, the manufacturer is subject to risks ranging from delayed deliveries to devastating damage to its reputation.
Boeing, for example, outsourced the manufacture of the lithium-ion batteries for its 787 fleet to a supplier in Japan. Unbeknownst to Boeing, the supplier used manufacturing methods that could introduce potential defects, and the supplier’s inspection methods failed to detect the problem. In January 2013, the battery on a Boeing 787 jetliner that had just completed an intercontinental flight to Boston sparked a fire.
A report on the incident from the National Transportation Safety Board found that the Japanese supplier “did not test the battery under the most severe conditions possible in service, and the test battery was different than the final battery design certified for installation on the airplane.” The Federal Aviation Administration grounded the entire 787 fleet for about four months, and Boeing sustained major damage to its reputation and its bottom line. Additional insight into its supply chain might have helped the company avoid such losses.
Four Essential Components of Supply Chain Resiliency
A resilient supply chain comprises four critical components: visibility, responsiveness, integration and control, with vital support from processes and governance.
Visibility refers to a company’s insights on the various elements of its supply chain. Companies need to be aware of and understand multiple aspects of their suppliers, including supplier safety, quality, dependability, sustainability practices, compliance with local labor laws, subsupplier relationships, and business environments. Too frequently, though, companies concentrate primarily on cost and on-time delivery.
Instead, companies would be far better off considering a wider set of ongoing metrics and monitoring those metrics through methods as varied as regular interaction with suppliers and multifaceted supplier scorecards. Manufacturers should set ground rules for a supplier at the beginning of the relationship and proceed to manage the relationship according to those rules. This approach is much easier than trying to introduce rules and parameters after the fact.
But companies also should take the time to tailor and prioritize their ground rules. A company shouldn’t necessarily apply the same rules across its entire supplier base. The most critical suppliers—for example, those that drive the highest percentage of the company’s essential production or that provide noncommodity items—require the most detailed and developed ground rules.
Additionally, manufacturers should confirm that appropriate formalized metrics and monitoring processes are being used throughout their critical suppliers’ networks. Simply assuming that suppliers have the same or a higher level of visibility into their supply chain is a poor and potentially costly decision.
Fast-food retailer McDonald’s might agree with this proposition. The Illinois-based OSI Group has been the largest supplier of meat to McDonald’s for some time. In July 2014, a Shanghai television station claimed that an OSI subsidiary relabeled expired meat packages and used expired beef to make patties. Following this broadcast, McDonald’s was short on beef and chicken in China for three weeks, and sales in the region that includes China fell 7% that month. Six employees of the OSI subsidiary later were arrested for allegedly selling expired meat to McDonald’s, KFC and other chains in China.
When working with suppliers, a company must be able to identify the areas where potentially damaging issues could arise, such as a supplier’s inability to provide the requisite supplies for the short or long term, and move those parts of its chain based on the company’s or market’s demands. And in cases where a company is unable to preempt supply problems, it should be prepared to deal with repercussions in the media, including social media. The days when a supply chain breakdown could fly under the radar have been eclipsed in a ravenous 24/7 news cycle.
Chipotle seemed to acknowledge this reality when it ran into problems with a pork supplier earlier this year. Rather than trying to keep the situation under wraps, the Mexican food retail chain announced that it had suspended a major supplier after an audit found that the supplier failed to satisfy the company’s standards for humane treatment of livestock. It posted signs in about 600 restaurants, explaining that due to “supply constraints,” the restaurants were unable to serve their “responsibly raised pork.” Chipotle’s masterful responsiveness allowed it to turn the lack of an important product into a public relations coup by highlighting its ethical standards.
With suppliers dispersed globally, integration between supplier and manufacturer can be a challenge. Integration consists of two vital elements. The first element relates to integration within the organization. Departments that play crucial roles in successful planning and production should communicate clearly and frequently. The procurement department often is left managing the supplier relationship. To serve the supply chain needs more optimally, structured, recurring input from sales, production and other functions is required.
The second element of integration relates to the various suppliers a manufacturer uses. Companies must find ways to create a genuine connection with their suppliers and form relationships based on more than just cost. Technology, for example, can facilitate real-time integration with and feedback for suppliers.
Summits with important suppliers provide one way not only to improve visibility and responsiveness but also to facilitate integration within the supply chain. Manufacturers can realize substantial operational and financial gains by bringing suppliers of critical products together to evaluate if production time frames align with established time tables, identify barriers to performance and ways to improve, and foster open and transparent lines of communication. These supplier summits typically become part of the supply chain governance process, which allows for improvements in the overall process for the manufacturer and suppliers.
Control in the context of supply chain resiliency comes in several forms. To begin with, a company needs to put in place activities and processes that allow it to identify, monitor and mitigate risks. The company must strike the proper balance between imposing sufficient controls to reduce risk to the organization and imposing so many controls that the company can’t operate efficiently.
Governance plays a crucial role in the control of the supply chain by defining the structure of how the various elements interact in a clearly understood and consistent approach. It determines a company’s overall method for internally and externally setting, monitoring and communicating expectations, and for training employees and subcontractors about those expectations.
Governance also guides how a company will adjust to changes in the business environment and communicate those adjustments to suppliers. For example, a company might need to adjust to changes in the requirements or enforcement of the Foreign Corrupt Practices Act and communicate those changes to its suppliers.
Resilient Supply Chains Are Sustainable
A supply chain is an integrated system and therefore must be managed in an integrated manner with a clearly defined and communicated approach. The approach should encompass the elements of visibility, responsiveness, integration and control through processes and governance; without these elements, manufacturers are vulnerable to some of the risks that have befallen other companies. A resilient supply chain, on the other hand, leads to greater operating efficiency and reduced risk of failure to meet goals.
Bart Kelly is a principal with Crowe Horwath LLP, a public accounting, consulting and technology firm, in the Atlanta office. (www.crowehorwath.com). Mike Varney is a partner with Crowe in the Cleveland office.