In recent years, it has becoming increasingly clear that companies must think about a number of issues when evaluating the robustness of their supply chain.  Two categories of risk that are often left on the “cutting room floor” by supply chain managers are geopolitical risk and critical vendor risk.

Supply Chain 101: Geopolitical Risk

Look no further than the recent trade disputes with China that have added between 5% and 35% or more in some cases to imported product costs.  During the past few years we’ve become acutely aware of the potential for sudden geopolitical shocks to our supply chains.  In most instances, these shocks had no recent precedent so management teams spent relatively little time creating or testing scenarios in the event of disruption. 

While it can be prohibitively expensive to start a supply chain for the sake of running dual sourcing options, there are steps you can take towards that end so you aren’t starting from a complete standstill. 

• Qualify vendors if you are buying finished product – make sure they meet your quality specs, packaging capabilities and volume requirements (among other things).

• Qualify sources of raw material supply if you are manufacturing, blending or not buying finished product – ensure that specs are appropriate, negotiate pricing to the extent possible and purchase quantities in advance for testing to be sure you can use the second source option.

• Secure a logistics relationship in the second/alternative source country.  You might have a well-established relationship with a global freight forwarder or shipping line, but these large companies are often the sum of small local teams.  Make sure you have some relationships with the folks “on the ground” as if the need to move your sourcing arises you can be sure that others will be doing the same thing and relationships matter.

Supply Chain 101: Critical Vendor Risk

Many of us have heard of (or lived through) the story of a single seemingly harmless, inexpensive component that was sourced from a supplier that was loved by engineering.  If you haven’t, I have a story for you: 

Once upon a time, a $20 billion revenue Silicon Valley giant was building enterprise class products that relied on one single chip for a critical function.  That large company had an order for $2 billion from an even larger telecommunications company that was eager to roll out a new network.  Upon placing a large order with the component supplier (for 2000 units of a $30.50/unit item), it was discovered that the chip vendor was going bankrupt in a matter of days and running out of cash.  The supplier did not notify the large network equipment maker because they were under the impression it was just an engineering exercise.  The network equipment maker did not connect the dots between procurement and engineering, and the large telco didn’t think (quite reasonably) that it had to ask if all critical vendors had been properly qualified.  In the end, the network equipment company acquired the small chip vendor and was able to satisfy the large telco order – disaster averted.  Here are some steps you should take when analyzing your vendor base/products:

• Examine your Bill of Materials, determine critical vendors that are single sourced and perform the appropriate financial and operational due diligence on the vendor in question

• Identify and qualify second sources of product, and order from that second source with some regularity (an 80/20 or 70/30 split is most common)

• Again, remember, in the event that a supply chain disruption occurs with your primary vendor you are going to be part of the group of customers rushing towards companies like your second source.  Don’t get left behind or out in the cold because you did not order from them in the past or treat them like “part of the program” on a regular basis.

Having a plan makes all the difference:

The key message here is don’t get caught without a plan.  While you can’t predict the specific events that may transpire, you can predict with some reasonable probability that some event will occur in the next several years that might disrupt your supply chain.  If you have a plan that is ready to execute, you can not only avoid the disruption but potentially position yourself to grow and advance while your competitors scramble to sort themselves out.