Smart Supply Chain Managers know that it is important to monitor what is happening with their supply chain partners. The big question is which partners should they monitor?
It is tempting to use Vilfredo Pareto’s principle and focus on the 20% of suppliers or customers that make up 80% of expenditure or income. While there is certainly good support for keeping an eye on these ‘big fish’, there is good theory behind taking a different path, or at least including others in the net of partners that are kept under review. So while it is certainly important to stay close to those supply chain partners that make up most of the firm’s activities at the same time there are also a number of reasons to go deeper into the supply network.
High volume suppliers or customers are the source of a large proportion of a firm’s business and any loss or failure of these players is going to have a serious impact. Such large entities are also quite likely to be strong and resilient businesses in their own right. As such, they are unlikely to provide an early warning of problems in the broader economy. These larger players are quite likely to exhibit signs of distress about the same time as your own business (or perhaps after as your difficulties impact negatively on them).
So why focus on second or third tier suppliers or customers who are a much smaller part of a firm’s business? The answer lies precisely in their status as small and insignificant members of the supply chain. As smaller players they have less buffers and protections against the problems of an economy. Larger suppliers are like the frog in the slowly boiling water; they fail to identify the change in their environment because of their scale. Small suppliers or customers have less resilience and a change in the economy is immediately obvious to them.
The use of the term smaller is also relative. A well-documented example of a supply chain failure that could have been moderated if the focal company had tighter linkages with suppliers further back in the supply chain, involves the Boeing 787 program delays. In essence, Boeing failed to identify a number of significant events/changes that were occurring in its supply chain for specialist fasteners, in particular the concentration of fastener manufacturers and the constraints on titanium supply. This resulted in a delay to the 787 program by several years. The organisations that failed in Boeing’s fastener supply chain were not insignificant in size, but they were not tier 1 suppliers to Boeing, so did not feature on the radar.
Thomas Choi and Tom Linton in a Harvard Business Review Blog “Don’t Let Your Supply Chain Control Your Business” highlighted the above points along with several others:
- By having relationships further back into the supply chain firms are better able to control costs.
- Smaller more innovative suppliers (and customers) are likely to be more innovative and be the source of new ideas.
- In a world where ‘Stewardship’ of a firm’s supply chain is expected sustainability and social responsibility risks reside with smaller suppliers further back in the supply chain. Ask Mattel (lead paint), Apple (worker suicide) or various clothing manufacturers (child labour).
So what should firms do about the challenge of collaborating back into their supply chain? The first step is to understand “who is involved”? All too often firms can reliably talk about customers two and three tiers forward from their own business but only one or two tiers backward into the supply base. There are a number of reasons for this including that tier one suppliers are unwilling to pass this information on for fear of being eliminated from the chain. A collaborative ‘Supply Chain Mapping’ project focused on making the supply chain more reliable for all participants may overcome this reluctance. Then like Honda has done identify participants that it makes sense to interact with (you obviously can’t have a relationship with all). Then decide whether you want to formalise the relationship; Honda will have contracts with sub-tier suppliers for quality, appearance or cost control purposes. But again this approach presupposes a trusting and collaborative supply chain ……… a subject for a later Blog perhaps!
If you would like to know more about how to collaborate with sub-tier suppliers, please feel free to contact us at firstname.lastname@example.org or call +61 (0)419 581 705.