The @Risk blog (an excellent blog, by the way) has an interesting article asking “Do you have a Supply Chain Risk Management Process in Place?” According to a poll conducted during Aravo’s supply chain risk webinar series, 71.4 percent of those polled said their biggest concern continues to be risk of supplier viability. Yet another study highlighted in the article shows that when companies decide to outsource only 10% actually perform a risk assessment. The remaining 90% focus only on unit cost, transportation and inventory impact. So...let me get this straight. 70 percent of people say supplier viability is their biggest risk...yet only 10% of people do a risk assessment when analyzing outsourcing. Huh....go figure. So let’s take this back to the beginning and look at the outsourcing process. This process for the most part is expensive, time consuming and difficult. You decide you want to outsource your manufacturing process. The goods being outsourced are your best selling products. These are worth millions to you. You find a supplier, negotiate a great price and terms and you make the deal. Then you move tooling and design specs, spend weeks, maybe months getting the manufacturing processes up to speed. You work though the logistics process of moving goods from your CM (typically oversees) and finally, after months of effort you have a stable supply of goods coming from this CM. There is a LOT of effort involved in this process. And yet, according to the study above, only 10% of companies going through this process take the relatively small additional effort of doing a risk assessment! Imagine for a second that you have just completed the outsourcing effort I described above. You’ve received your first shipment of goods from your CM and are expecting the next shipment to leave the factory in a few days. Your phone rings...the CM has just declared bankruptcy and has closed their doors. Oh **** (insert appropriate expletive). What about that shipment that was just about ready to go? Where is it now? You’ve got customer’s waiting for that shipment. What about that special tooling that you shipped to the now defunct supplier? How are you going to get that back? Are you going to get it back? How long will it take to get new tooling made? How long will it take to get another supplier set up? Is the bar open yet??? Why didn’t we look into the financial position of this company before we entered this agreement?!?!?!? So...obviously, we don’t want to find ourselves playing out this little scenario at some point in our professional lives. How do we avoid it
- When outsourcing, include a risk assessment along with price, terms and inventory analysis. Make sure that the risk analysis includes financial information. If the company is public, this is easy enough to get. If the company is private, it will take more work but is usually do-able.
- Maintain your risk assessment. If the last 2 years has taught us anything, it is that companies that may seem fine when times are good can crumble to dust when things go bad.
- Establish mitigation strategies. Even a financially strong company can succumb to disaster (the earthquake in China a while ago is proof of that).
- Improve your ability to respond. Put the tools, practices and people in place to allow you to recognize an event and respond quickly to it. For details on capabilities need to respond quickly to significant supply chain events, check out a post I wrote about this last year.
What sort of risk assessment do you do when outsourcing? Comment back and let me know!