There was an excellent article in IndustryWeek based on a conversation with Jim Lawton from Dun and Bradstreet Corp which talks about the importance of knowing who your suppliers are and what their current state of health is. The article raises some really good points about the knowledge we should have about our business partners. From the article “One of the lessons learned … was that we often do a very good job of looking at the creditworthiness of our customers and their ability to pay us, but we don't do as good a job looking at the financial wherewithal of our suppliers,"
This is ironic when you think about it. If a customer fails, we have some options to reclaim some of our lost money, however, if a supplier fails, the impact could be far greater! Yet we will check the customers health before we accept a sale, but we often don’t check our suppliers health prior to sourcing from them. Also discussed was how risk factors have changed as companies try to reduce the cost of their supply chains.
In our focus on reducing costs, we’ve reduced our supplier base, we’ve single sourced on suppliers that have the lowest costs, and then pressured these suppliers to reduce costs even more. Then we are surprised when these suppliers don’t make it through a recession. The article says it well; “Companies, by and large, pay too much attention to the costs and not enough attention to the risks, and so when the economic downturn did hit, very few companies had invested in and developed a robust risk management infrastructure that would have given them an early warning."
We’ve talked about this issue in a previous blog post; Newest Supply Chain Risk: Zombies. Especially now that demand has started to turn around, many suppliers have cut so deep and been hurt so bad by the recession that they will be unable to respond when your demand hits them. The difficulty of assessing supplier risk is when companies have grown through acquisitions and as such, have large number of disparate ERP systems. Often these companies have no centralized view of who their suppliers are and what goods those suppliers provide.
The article provides an extreme example, but even when dealing with much fewer ERP systems, there is still a significant issue to overcome; “There's a particular company I'm thinking of that has 72 different ERP systems," Lawton says. " … They don't have a single view of all of those companies that ties together all of the interrelationships in terms of this company is partially owned by this company, and so risk in one is potentially setting up risk in the other." While the article does a great job of detailing the importance of understanding the financial health of your supply base, I’d like to expand on a few points;
- First, remember that your supplier is only as good as their suppliers. Your supplier could be very healthy, but your supplier’s supplier could be in trouble. If one of those supplier fails, you are in just as much trouble as if your supplier failed.
- Next, identifying a supplier that is at risk is only half the battle. Understanding the impact of that supplier failing, and knowing what alternatives you have should that supplier fail is key to your establishing a mitigation strategy.
- Finally, the article raises a good point that focusing on only your top suppliers, while often necessary if you don’t have the tools to manage a larger set, is not protecting you from significant risk. That 20th ranked supplier could still cause significant pain were they to fail. That being said, companies need to start somewhere. If you haven’t started a supplier evaluation project yet, you need to establish a rational for where to start. Looking at those suppliers that have the largest impact to sales is probably a reasonable place to start.