By Bill Michels, CPSM
For Management Today
Last year the global auto industry was caught by surprise when the Japanese tsunamis knocked out the factory that makes a black paint pigment used by several car companies. Although they had different paint suppliers, all those suppliers purchased that particular black pigment from a single plant in Japan.
This year an explosion in a single factory in Germany disrupted 50% or more of the supply of a critical resin used in brake hoses and fuel lines by all three U.S. automakers. The Detroit News reported that 200 engineers, purchasers and others gathered outside of Detroit shortly after the blasts to figure out what to do next. Although the Evonik Industries AG plant in Marl, Germany only produces 25% of the world's supply of nylon-12, a petroleum resistant resin, it also supplies a critical chemical building block used by suppliers of another 25% of nylon-12.
Now, it does show progress that the industry responded quickly after the second accident to sort out alternatives, but it's still shopping for an umbrella after you've already been caught in the rain. If the car companies had traced the sources of their components all the way back to their raw materials, they might have noticed how vulnerable they were to the output of a single plant. And that should have led them to formulate risk mitigation strategies that could be implemented the moment the news of the explosion hit Twitter.
You can be pretty sure that those companies have learned from those experiences, and you can, too. The task of identifying risks in your supply chain begins with a process called mapping. The idea is simple in concept but daunting in execution; it means tracing every part from a tier-one supplier back through tier two and so on to the source of the raw materials. IBM has done this in order to better manage inventory and deliveries within its supplier base. Its critical parts management tool gathers information about 120,000 unique part number supplier relationships and displays it in “dashboards” that alert managers to potential bottlenecks anywhere in the supply chain. IBM says the system delivered $25 million in savings over two years just by better matching supply to demand.
That scale of a system is not appropriate for every supplier to every business, so the first step in mapping a supply chain is to identify the categories where the need is greatest. Anything your company buys can be placed in a matrix where one axis is the importance of that item to your business and the other axis is the difficulty you have sourcing it. That’s true for both manufacturing companies and service businesses. As you build that matrix for all your tier-one suppliers, it will become very obvious that you should concentrate your effort on the quadrant that has items that are both critical to the business and hard to source. Keep in mind your indirect purchases – equipment and supplies that keep your company going – as well as materials or components you might process or assemble. For example, cell phones may be indispensible to the business, but they are generally easy to purchase. On the other hand, a proprietary software-as-a-service delivered via the Internet “cloud” might deserve a look past the software provider to the supplier of its servers or server space. You may be surprised to find how many of those companies are renting space from just a few large companies such as Amazon Web Services.
Once you’ve identified your highest priority items – critical and hard to source – take a second look at items that are critical, but easy to source. In some ways, those are the most dangerous because it appears that you have many options if one source is disrupted, yet all those tier one sources might rely on a single supplier deeper in the chain. That’s exactly what happened in the Japanese paint pigment disruption. Automakers had several suppliers for premium black paint – but they were all buying the same pigment produced at a single Japanese plant in a tsunami zone. We can all learn from that lesson.
The next step in the process is the tough one, and that’s why so few companies execute it well: asking their tier-one suppliers to map their own suppliers deeper into the supply chain. The key to this process is overall good supplier relationship management. The suppliers you are asking to help are those that already have a strategic relationship with you – whether or not you recognize it. Their products are difficult to source and essential to your business. You are stakeholders in their business and vice versa. You had better be their best customer!
Mapping a supply chain is a prudent risk-management task, regardless of where your company stands in a supply chain. Present it to your supplier base as a win-win process, and if you anticipate reluctance, consider what incentives you may be able of offer to encourage participation. Transparency has value and it generally requires trust to have it delivered to you.
To make informed decisions from your supply chain map, you will need to identify not only the sources of material or components, but the alternatives at each stage. It is not enough simply to know that the resin for a hose lining comes from a plant in Germany; to be prepared the automotive companies needed to know that plant produced material for many intermediate suppliers either directly or indirectly. As difficult as this process may be, it has the side benefit of helping you and your suppliers identify potential cost savings from those alternatives you discover.
For instance, The Wall Street Journal recently reported that 3M mapped its supply chain primarily as a cost-savings measure. The global manufacturing company realized that it was shipping the components of a relatively inexpensive consumer product hundreds of miles from plant to plant in several steps to take advantage of both its internal and external manufacturing capacity. The strategy may have been a good one in an era of $2.00-a-gallon fuel, but it became wasteful as fuel prices hover near $4.00 per gallon. As a result, 3M is trying to aggregate more of its supply chain into local clusters.
More and more consumers want to know the sources of what they consume, and your customers, even if they are other businesses, may feel the same way. You not only stand to mitigate risk, but actually add value to your own customers if you can accurately map your own supply chain.
Bill Michels is president of ADR North America, a consulting firm specializing in global supply chain management.