In essence:
Businesses need to increase their supply chain resilience efforts by looking into risks with tier 2, 3 and 4 suppliers if they have the funds and resources to do so.
By mapping the whole supply chain, businesses can identify every supplier in their network and ask partners to complete thorough evaluations to help them decide where to focus their time and resources.
Make your important partners stronger by assisting suppliers in meeting compliance requirements, trying to be a good customer, and even providing financial assistance when necessary.
Even with all the supply chain mishaps of the previous year, a boat being stalled in the Suez Canal in March was the single occurrence that best demonstrated the vulnerability of these international networks. Images of the large container ship Ever Giving with her bow wedged in the Egyptian waterway’s bank rapidly went viral. Specialty salvage crews worked nonstop for six days to rescue the ship, but the obstruction of a vital passageway through which 12% of world trade moves caused significant delays.
Supply chains were already a matter of conversation when the Ever Giving became stalled. Early on in the pandemic, there was a shortage of several things, and it is still going on today with a microprocessor shortage that has stopped the creation of new cars. There will undoubtedly be more issues in the future, so organisations need to find strategies to identify these risks and prepare for the next upheaval. While it is impossible to foresee every scenario, businesses with greater financial resources and resources can take real efforts to reduce their risks.
Think about the chip scarcity. Ford recently stated that it expects to produce barely half as many cars in the second quarter of 2021 as originally anticipated and projects that the global shortfall would cause yearly production to decline by more than 1 million vehicles. Contrast that to Toyota, which, according to Bloomberg, has four months’ supply of semiconductors stored and is mostly unaffected by a crisis that might cost automakers $60 billion. Toyota had that extra inventory because, in the wake of the devastating 2011 Japanese tsunami that shook its operations, it selected semiconductors as one of the 1,500 vital components for which it needed reserves. The Japanese automaker strategically decided to keep these chips on hand, and as a result, it currently enjoys an advantageous position in comparison to its rivals.
These problems have the ability to reduce revenue and damage relationships with both current and potential customers, as the situation with Ford demonstrates. They may also harm their reputation for a long time. Likewise, the parameters through which businesses perceive their supply chains and the liabilities contained therein have grown.
Even if it wasn’t adequate for a pandemic, the majority of larger corporations already had some sort of supply chain resilience strategy. But, they are constantly seeking for new ways to lower risk in this network. The dangers that upstream suppliers pose to businesses, how they might identify and assess those risks, and the technology required to make it all work will all be covered in this article.
Looking Beyond Obvious Supply Chain Risks
Established companies typically have a handle on the risks — namely economic, environmental, political and ethical — presented by the suppliers they work with directly (i.e., tier 1 suppliers). In many cases, they have already addressed these concerns by finding alternative suppliers in another location or cutting ties with those that posed too great a liability.
But the scope of supply chain resilience has grown to account for the issues posed by more distant suppliers at the second, third and even fourth tier. Often, these suppliers to a company’s suppliers are essentially invisible to the company selling goods or services to end users. The working assumption has been that a business manages its immediate suppliers, those suppliers manage their suppliers and so on. But that approach is no longer sufficient.
“Now you’ve got to work across your supply chain,” said Steven Melnyk, professor of supply chain management at Michigan State University. “That means you’ve got to work with your first tier, your second tier, your third tier, your fourth tier. Guess what? [In the past, companies] basically developed strategies that are driven to work with your first tier.”
There are numerous examples of businesses suffering serious reputational and economic damage because they failed to conduct due diligence on upstream suppliers. In 2016, The Guardian released an explosive report that connected Vauxhall, BMW, Volkswagen and Audi to a mica mine in India that had children as young as 10 working in harsh conditions. After being bought and sold multiple times, that mica was eventually used in the paint of those big-name car manufacturers. Almost a decade before that, Toymaker Mattel recalled nearly a million toys because a Chinese supplier had covered them with lead paint.
New regulations could augment the impact of these errors in judgement. The EU is working on supply-chain legislation(opens in new tab) that requires businesses to conduct due diligence on any organization in their supply chain to ensure these partners are not committing human rights violations, breaking environmental regulations or supporting corruption. If the EU finds that a business’s tier 4 supplier is paying off government officials to ignore harmful labor practices, for instance, it can levy large fines on that business.
Additionally, the United States-Mexico-Canada (USMCA) trade agreement that took effect this past summer requires businesses operating in or sourcing anything from these three countries to follow certain labor standards. All countries must adopt laws that protect workers’ right to collectively bargain, ban forced labor and child labor and prohibit employment discrimination.
Without knowledge of who and where these partners are, it’s of course impossible to know whether all of your suppliers are in compliance with such a regulation. And 90% of chief procurement officers surveyed by Deloitte in 2020 said they have “very low to moderate visibility” into tier 2 partners and beyond. In fact, only half even have “high or very high visibility” into their tier 1 suppliers.
So how can organizations gain greater transparency?
Mapping Your Supplier Network to Identify Risks
One proven approach is supply chain mapping. The deeper you can go in mapping out each node, the better. Jim Yarbrough, a global intelligence program manager at BSI Group, has seen large enterprises map their supplier networks(opens in new tab) all the way down to the raw materials level. That level of traceability is critical in industries like pharmaceuticals or food production.
Mapping should be a collaborative effort. Yarbrough noted that at bigger companies, individual departments often have different views on who is even part of their supply chain because each interacts with different vendors. If you have a lot of suppliers — more than 20 or 30, let’s say — this can get quite complicated. That’s when companies often turn to supply chain mapping software.
This type of system can note whether suppliers are primary or backup providers of a certain material or good, and users can sort them by compliance score, overall threat rating or other factors. As a business adds or removes suppliers, it can update the digital map accordingly, without remapping the entire network. Such a system also helps stakeholders who don’t work in procurement and manage these contracts on a daily basis keep track of any changes.
Once that exercise is complete, you can begin assessing the risk of each party involved in this network. There are a number of formulas you can use to rate the risk of various suppliers, which we covered in detail in our first story on identifying and mitigating supply chain risks.
Supplier assessments are another way to understand the threats vendors at each tier of your supply chain present. This assessment often takes the form of a questionnaire that’s sent out to some or all partners. It could include anywhere from 100-2,000 questions (yes, 2,000 questions could be overkill in many cases) framed around best practices, according to Yarbrough. Respondents not only answer the questions but also provide evidence of their compliance by uploading documents into your system.
This assessment will highlight risks like a high rate of crime, poor working conditions or lax enforcement of regulations. Operational leaders can use that information to decide where to focus their attention. From there, they can evaluate the strategies below to determine the best way to help partners.
Strengthening Your Suppliers
Helping suppliers improve upon their biggest weaknesses not only reduces risk for your business but also should also strengthen supplier relationships, which can carry a lot of weight when an issue arises. In those situations, vendors will often prioritize customers that have demonstrated they value the partnership.
Obviously, you could find a new vendor in most cases, but that comes with its own challenges. With that in mind, let’s walk through a few other options to consider.
Implement compliance standards.
Simply telling vendors to make improvements isn’t enough; executing your suggestions might not even be feasible for your vendors without your guidance and assistance. Large standards organizations like BSI have developed standards in areas like supply chain security, business continuity and risk management. Committees of experts from trade associations, research organizations and governments, as well as standards users and consumers, draw up BSI’s standards, which include both “recommendations” and “requirements.” The standard for business continuity management, for example, mandates that a business continuity policy has objectives aligned with the company’s strategic goals, creates a clear plan of action and is reviewed regularly. Other large standards organizations include the International Organization for Standardization (ISO), and more specialized groups are the Association for Supply Chain Management (ASCM) and the Council of Supply Chain Management Professionals (CSCMP).
A business could ask its suppliers to review standards from one of these groups, then perform a gap assessment to understand where they fall short, perhaps with the goal of receiving certification from a body like BSI. This process often requires assistance from an outside consultant, which your company would likely need to pay for. Suppliers understand that what’s good for one customer could also make them more appealing to another, so they’re usually happy to cooperate, Yarbrough said.
Lend your expertise.
In most cases, your organization will have skills or knowledge from which your supplier could benefit, especially if it’s a smaller entity. Melnyk uses the example of a supplier looking for cybersecurity software, and the customer recommending a few vendors it’s already vetted. Another way a larger organization could lend its expertise is by giving a supplier access to its legal staff to help write and review contracts or assist with other documentation. In any case, it reduces the time and money your partners have to spend dealing with challenges.
Offer financial support.
As the pandemic brought many businesses to the brink, some companies offered financial assistance to their suppliers, said Joe Sarkis, a supply chain management professor at Worcester Polytechnic Institute. For example, some customers paid ahead for future orders to provide immediate cash flow. In general, 80% of large consumer electronics businesses lend financial support to suppliers in times of crisis, according to a report from the ASCM and The Economist Intelligence Unit. While this isn’t an option for everyone, it is perhaps the strongest move a business could make to earn a partner’s goodwill.
“Once you help them, they become part of your company,” Sarkis said. “It’s not a full vertical integration, but they become loyal to you, so when the crisis does come up, they’re willing to bend over backwards because you’ve delivered this.”
Understand what matters
In a survey Melnyk conducted of 1,300 suppliers to a U.S. military branch, the five factors they rated as defining a “good” customer were: mutual trust and respect, profitability, joint problem-solving, simple and complete RFQs and timely awarding of contracts. Consider that many of these traits speak to responsiveness, communication and the general nature of interactions. In other words, being a favored customer is about more than just spending a lot of money with a supplier.
Companies are realizing the need to think of suppliers as strategic partners, and they’re making strides in the right direction. “Greater collaboration with external supply chain partners” ranked third among the ways businesses plan to build resilience moving forward, ASCM said.
“The amount of maturity that I’ve seen in organizations devoting time and effort to their suppliers is just so much better than it was a decade ago,” Yarbrough said. “You’re getting really savvy supply chains now; you’re getting people understanding, ‘I need to develop that relationship; I need to make them understand why this is so important to us.'”
Realizing That Suppliers Have Power, Too
Many businesses, especially bigger ones, make the assumption that as the customer, they should always set the terms of relationships with their suppliers. After all, they’re the ones paying for services. But it’s not always that simple.
Expecting “compliance-driven behavior,” in which the supplier bends to your demands, might not always be the best approach. For example, not all partners might agree to adhere to compliance standards like those suggested earlier. The best suppliers — and those providing a unique product or service — often have options when it comes to whom they work with. It’s especially problematic to risk deterring suppliers that aren’t easily replaceable.
“Most of the time when we look at critical suppliers, we look at how much do we buy from them,” Melnyk said. “We don’t look at the question the other way — if they were to leave, how easy would they be to replace?”
Government agencies, for instance, often have an extensive list of requirements their suppliers must meet. As a result, the U.S. Department of Defense’s supplier base has shrunk 27% even as its budget increased 39%, according to Melnyk. The cost of meeting exhaustive standards can be steep, and some decide it’s simply not worth their time and energy.
Decision-makers should also consider that suppliers can turn them down — and that staying in good standing has real business benefits. Consider the annual Supplier Working Relations Index (WRI) from Plante Moran, which surveys more than 500 tier 1 suppliers to six of the world’s largest automakers. For the past decade, Toyota has had the highest WRI, with Honda usually in second place.
These “strong working relations reduce the cost to OEMs of doing business, help improve efficiency and productivity and reduce time to market,” Plante Moran said. Toyota recognizes the “power of being a good customer,” Melnyk said, and acts accordingly.
Cost savings are not the only reason to develop strong, collaborative relationships with suppliers. As organizations attempt to gain a clearer picture of their tier 2, 3 and 4 suppliers, they often have to go through those tier 1 or 2 partners they already communicate with regularly. Those downstream suppliers are much less likely to help you build that bridge to their vendors if they don’t feel a sense of appreciation and respect, Melnyk noted.
Additionally, suppliers can be a “phenomenal early-warning device” of impending disruptions, he said, because they work with an array of customers. They may be aware of problems not yet on your radar.
“It’s no longer investing in risk like an insurance policy. It’s now thinking differently about supply chains; it’s thinking about relationships,” Melnyk said. “So suddenly, what we’re starting to find is that the skills that companies develop to deal with the pandemic — the companies that survive had good relationships, they were able to work with their suppliers — are the very same skills that we need to deal with risk and resilience.”
Building a Supply Chain Control Tower
The supply chains underpinning the global economy rely on technology, and they have for some time. The types and functionality of software and hardware that keep everything running smoothly, however, continue to evolve.
The growing volume of data produced by the receipt, production and delivery of supplies has led to the idea of a supply chain control. A supply chain control tower pulls information from all of your supply chain information systems — procurement, manufacturing, inventory management, order management, warehouse management and more — to offer a comprehensive, real-time view of supply and demand, highlighting the most important KPIs and updates.
“The control tower would have the ability to take all the information so that when you get to the sales side of it, they’d be able to look at it and say, ‘We’ve got a problem because my supplier in Qingdao said they were going to make 40,000 widgets a week, but they can only make 20,000,'” said Tony Nuzio, founder and CEO of ICC Logistics Services. “They’d be able to see that [and work to compensate for it].”
As businesses realize how much supplier issues can affect their bottom line, they’re increasingly interested in being able to access partners’ systems to see the most up-to-date information. Seeing that a supplier is running behind schedule on production of two components you need could give you enough time to get in touch with an alternative provider so you don’t run out of stock. Although more than half of respondents in the ASCM survey said they estimate supply and demand based only on internal information, tighter integration with suppliers could soon be more common.
“I think we’re going to see contracts that demand a lot more granular data from suppliers up the chain, with continuous monitoring as well as access to historical performance under adverse conditions,” said Chris Nicholson, CEO of Pathmind, whose software product applies AI to industrial operations.
Enterprises are finding more uses for internet of things (IoT) devices in their supply chains, as well. A vehicle tracking device could show the exact location of a truck bringing products to your warehouse or whether there’s a dock available for unloading. RFID tags attached to pallets could tell you whether a retail partner received its latest shipment. All of this data can feed into the control tower, giving enterprises an even more detailed, up-to-the-minute view of their vast networks.
The Bottom Line
Before the coronavirus slowed and shut down many factories, warehouses and ports, many companies were “fat, dumb and happy,” to use Nuzio’s words. Outsourcing much of the supply chain to distant countries had lowered costs and, for the most part, worked perfectly well for the past three decades. The lack of visibility into tier 2 and 3 suppliers was not a pressing concern, and organizations learned to work around long lead times.
But 2020 changed that outlook, perhaps for good. Businesses are focused on finding and addressing risks with their supply chain partners and will take a closer look at potential partners before bringing them in. It’s the logical path forward, and the value of these efforts will show soon enough.
“The pandemic, the chip shortage — all of those tell us in no uncertain terms how the system has gone wrong,” Melnyk said. “Management is aware of it. Newspapers are full of the failures. If you want to bring about a change, this is the time to do it.”