In a recent engagement, we were involved in obtaining RoHS-related documentation from our client’s suppliers and came across a startling discovery: two of their suppliers had gone out of business. Had we not discovered this, our client would have never known until there was a need to place a new PO.
We have all read and may have personally felt the impact of the economic downturn. Financial system chaos, Chapter 11 filings, emergency mergers and acquisitions, massive lay-offs, rising unemployment; the list of troubling indicators goes on. Many companies are in survival mode and have turned their attention to a narrow set of issues: reducing near-term expenses, maintaining cash flow, reducing inventory, and driving orders to protect market share. While these steps are necessary, there is something more fundamental that some companies have not yet internalized: the financial viability of their suppliers.
There are economic undercurrents that could shift the foundation of your supply chain and you need to be vigilant. If you do not know how your suppliers are weathering today’s economic storm, you could find yourself short of material, or worse, short a key supplier because they went out of business. The last thing you want in the midst of growing inventories and margin pressure is to miss revenue shipments because one of your suppliers folded. Here are some steps that you can take to ensure that you don’t wake up to an unpleasant surprise:
- Classify your products based on their importance to your business. Given the lean staffing levels that most companies are keeping, you need to put your energy where it will have the most impact. You can rank products based on various attributes that contribute to importance, such as gross margin, revenue potential, position on the product life cycle, your competitive position in the market, etc. The key is to make sure that before you start investigating suppliers and components, you keep a higher level perspective at the product level.
- Identify complex, sole-source components that would be difficult to re-source with other suppliers. This would constitute special technology components that are critical to the functionality of your product and supplied by only one supplier. Any supply disruptions in this case could lead to months of redesign and qualification activity, jeopardizing your shipments in the interim and leading to unexpected costs.
- For the components you identified above, reach out to your supply base and gather intelligence about their financial health. How have these suppliers been impacted by the economic downturn? How much mindshare do you have as a customer? What are their forecasted projections and how could that impact you in terms of plant closures, availability of cash and credit, and headcount required to support your business? For suppliers that are private companies, ask for copies of their audited financial statements and conduct a thorough financial analysis based on the numbers on their balance sheet and income statement. You should do this for public companies as well but this will be much easier since their financial reports are available online.
As you begin to uncover potential areas of risk, keep in mind that the sooner you discover them, the more options you will have in terms of solutions. Here are some approaches you can consider based on your discovery:
- Investing in your supplier vs. alternate sourcing. If your supplier is in trouble and is headed for disaster, think seriously about what remedies you are willing to consider. Does it make sense to invest time and perhaps cash into your supplier to keep them afloat or are you better off launching a sourcing project and moving the business to a more stable company? The path you decide to embark on will be driven by the dollars and cents that you compute under each scenario.
- Investing in the relationship. If mindshare is something that you are concerned about and you want to differentiate yourself from other customers of your supplier, invest in the relationship and be as transparent as you can be with your projections. Make executive to executive communication more frequent during hard times.
- Putting your requirements on record in the form of a contract that has preferential terms for both you and your supplier. Approach the contracting process collaboratively and make sure that it is designed to both “give” and “take”. For example, you may require that a certain amount of cash or credit line will always be maintained by your supplier to ensure continuity of supply for your forecasted requirements. In return, your supplier may ask that you award them with a certain share of your business or commit to certain volumes. The terms that we are discussing here should be very specific, time limited, and focused on weathering the current storm, not just the generic language that are commonly seen in contracts. If you already have a contract in place, adding a brief appendix or exhibit will likely suffice.
- Designing out risky suppliers – especially in the case of new products. You may want to explore the market and identify substitute components or technologies that you can use to replace a risky supplier. This involves close collaboration and teamwork between engineering and operations, and in particular, purchasing. The component selection process needs to be carefully reviewed during these times to make sure you are not bringing on any suppliers that will be problematic down the road.
The current economic times are unprecedented and challenging. While you are taking the necessary steps to ensure survival, you must keep a close eye on your suppliers. Most companies are running with very lean staff and have little to no bandwidth to allocate towards the firefighting that will be required when a supplier folds. You will invest much less time and money if you take preventive measures now. It is our belief that given what has transpired in the past few months – and is projected to continue in the coming months – you will avoid painful surprises by being proactive.
If you feel that we can help assess your supply chain risks and help you with mitigation plans, please let us know. We can provide the extra bandwidth and expertise your organization might need. Please feel free to contact us at info@symphonyconsult.com.