Moving out of Supply Chain after economic crisis

Purchasers and supply chain executives caution - during economy rebound

With the economic rebound expected to happen soon in the international market place, there are several aspects purchasing and supply chain executives need to take care of

Understand & ensure that the supplier is well informed – Recession has hit every on in the chain (Since its supply chains competing against each other and not companies). So it is important to ensure that the supplier is informed of the rebound and make a personal visit. This visit can ensure the availability of capacity, employee skills and a reaudit of the capability of the suppliers to bounce back. This is also a time for the OEM’s or supply chain captains to understand and listen to the problems of the suppliers. Its also worthy to ask how the supplier has survived the recession, to understand the resilience of the supplier.

Go till the tier 2 – Though most companies try to manage only the tier 1 companies, it is important to reuderstand the tier 2 companies of the supply chain. This ensures that the supplies are being streamlined and also that the tier 2 is able to ramp up production.

Check for new opportunities – Rebounce is a good time to check the existing structure of the supply chain. Check for new opportunities with existing suppliers and also check for new suppliers for old activities. New opportunities might open up because of technological changes, new cost reduction opportunities, change in supplier role and availability of new and better suppliers.

Differentiating disturbances and disruptions in supply chain

When we talk about risk management in supply chains there are two typical parameters used in risk evaluation. They are severity of impact and the probability of occurrence (refer figure). This method of looking at risk has its roots in FMEA, where severity of the impact, frequency of occurrence and ability to detect are used as methods to assess risks.

It is interesting to differentiate between disturbances and disruptions. This helps to choose what type of strategies needs to be considered for different types of risks. Disturbances are high probability and low impact kind of events that needs to be constantly looked after. An example for this is the operational disturbances that companies need to handle constantly in supply chains. Disruptions are events that have low probability o occurrence but they have a high degree of impact in the supply chain. An example of this could be related to how the supply chains were affected during 9/11 attacks, Tsunami etc.., where these events do not occur on a daily basis, but when they occur there is a big impact on the supply chains.

Risk Assessment – Should the trigger be time period driven or event driven?

Most companies believe that their supply chain is constantly at risk and new risks are added in the course of evaluation. A McKinsey report (2006) also claims that though supply chain managers are aware of the impact of these risks, they are seldom prepared to handle them. It becomes necessary to assess the risks in supply chain – then it typically leads to two questions (1) How often should risks be assessed and (2) When should the risks be assessed?

Most companies have a risk assessment system in place and perform them on a quarterly or half yearly basis. Some companies perform risk assessment based on occurrence of certain events in supply chains. The best method is however a combination of both. The below are certain events which should trigger risk assessment in the supply chain

• Addition of a new supplier, customer, resource or product in the supply chain
• Major change in the companies supply chain strategy, big projects
• Due to changes or increasing uncertainty in the business environment (Competitors move, Geo political issues)
• At the juncture of major decision making like outsourcing, Make or buy etc..,
  
  

Emerging Market Sourcing - Risk Management

Sourcing from Emerging Markets has its risk associated with Supply Chains. Here are a few things to think about

Unaligned Supplier – All sourcing initiatives begin with testing the supplier capability which involves time and efforts from both supplier & customer. A supplier who faces immense opportunities (as in the case of China & India) poses risks of misalignment with customers. Unless a supplier is aligned to invest time and patience in co development it will risk the sustainability of the supply.

Lack of Good Suppliers – Emerging economies are characterised with few extremely good global players and relatively good/acceptable lower tier (who are not of global standard). Not everyone gets to work with the best suppliers hence they end up with working a large pool of acceptable suppliers.

Supplier Maturity – Supplier Maturity is a broad terms and has many facets. The suppliers who are in the acceptable band face lower maturity levels. Maturity in terms of Quality Management Systems development & adoption, Supply Chain thinking, Green Supply Chain initiatives, Corporate Social Responsibility issues etc.., which would finally affect the buying company. Companies are more interested in production to keep their capacities operating and less interested in delivery and quality consistency.

Hidden cost – Emerging market sourcing is clearly about cost saving. A savings percentage ranging between 20% and 45% is claimed to be possible on a landed cost basis. However the hidden costs of improper risk analysis & management risks to lower the cost saving potential.

External factors – Risks are associated with external factors like transportation, infrastructure, political stability, currency issues, government restrictions, customs and documentation issues also increase uncertainty in the supply base.

Consistency & Sustainability – Getting good quality product every time is an issue with companies from emerging market economies. Increasing consistency and sustainability involves higher amount of coordination, constant monitoring and supplier development.

Intellectual Property Rights & Legal system – This risk of piracy market, slower legal system rises risks of sourcing products with high IP content.

Responsiveness – Longer supply chain with increased inventory comes with reduced market side responsiveness thereby escalating lost sales opportunities. These needs to be factored in sourcing risks.

Defining Risk in Supply Chains?

Risk are generally addressed only when crisis takes place or during times of scepticism. But risk needs to be addressed and prepared for at all times even during good times to build resilience in the supply chain. Terrorist attacks ( 9/11 attacks), natural disasters ( Hurricane Katrina), supply disasters (Mattel toy supply chain incident in 2007) have been greatly discussed as supply chain risk causes because they are “sexy” and known to all. The definition of supply chain risk is so vast in scope and there are different ways to look at the risk in supply chains.

(1) Upstream (Supply side), Internal (Company/Enterprise focussed) & Downstream (customer side)

(2) Process Flow oriented - Physical flows, Information flows and Cash flow risks

(3) Functional orientation and performance ( Purchasing, Marketing, Logistics and Production )

(4) Time frame oriented ( Strategic, Tactical and operational)

(5) Environmental and Natural disasters

But so far not much of the focus has been from a perspective of Corporate Social responsibility and Carbon foot print (environmental sustainability in supply chains). There will be a growing need for these in the near future especially because of rising concerns for environment & climatic change coupled with increasing concerns of long global supply chains.

We have greatly acknowledged that the scope of supply chain is increasing, it is equally important to acknowledge that the scope and understanding of Risk, Roles and Responsibility also has increased.

Supply Risk Management @ Apple Computer

Apple Computer—Managing commodity supply risk
The Apple example is now famous. In a need to assure the successful launch of its NAND-flash-based iPod nano line of MP3 players, Apple entered into forward-buying arrangements worth more than $1B to lock in adequate flash memory capacity.
Through its actions to assure NAND-flash supply for the iPod nano launch, Apple also seized a competitive advantage by locking up so much capacity that there was no opportunity for a competitor to launch a similar flash-based product in the same time period.
Apple’s presentation focused on the methods it uses to monitor and assess market conditions for constrained components like flash-memory, and decide to execute supply-assurance strategies if needed.
As one of the world’s largest volume purchasers of flash-memory, Apple’s actions in the market give it power in that market, but potentially higher risk exposure that it needs to manage.
A key learning is to recognize critical commodities and suppliers, understand risk exposure, and execute mitigation action.

Nokia recalls faulty handset battery

Helsinki: Nokia Corp warned Tuesday that up to 46 million batteries used in some of the company's handsets could be faulty and pose a risk of overheating.The advisory applies to batteries manufactured by Matsushita Battery Industrial Co. Ltd. between December 2005 and November 2006, the world's largest mobile phone maker said.Japan's Matsushita is one of several suppliers that have together made some 300 million BL-5C batteries. The lithium-ion battery is one of 14 different types of battery used in Nokia phones.

Nokia said 100 incidents of overheating of the Matsushita-made BL-5C batteries had been reported worldwide, but added that "no serious injuries or property damage have been reported."

Last year, Sony Corp recalled more than 10 million laptops after it discovered that lithium-ion batteries used in them could overheat and catch fire. The recalls included notebooks made by other major computer makers, including Dell Inc, Lenovo Inc, Apple Inc and Acer Inc.

Nokia sells products in 130 countries and employs 110,000 people worldwide. In the second quarter, it sold 100 million mobile devices, claiming a 38 per cent share of the global market.

Source: MSN India

• What will happen to the Nokia brand image - one opinion is that it has released the total volume of batteries produced by the supplier during the time period which other manufacturers also bought, so quickly recalling the batteries before other competitors in a way I think saves the brand image.....?
• Who bears the cost of the recall and how are the logistics of it handled?
• What happens to the supplier during the recall? Most of the times companies push to supplier to bear the cost of the recall?
• It is much more of a power play issue, with Matshushita being among a large group of suppliers supplying a generic battery industry, it would be interesting to watch who bears the cost and how Nokia's supply strategy is changes a response to this?