October 2010 | Commentary | Viewpoint

Supplier Disruptions: Preparing for the Unpredictable

Tags: Supply Chain Management, Partnership, Risk Management

Chandler Hall is vice president of collaborative sourcing, BravoSolution, 312-279-6795.

Supplier disruptions are a reality for most shippers. In fact, 75 percent of supply chain professionals responding to a recent AMR Research poll indicated that at least 10 percent of their supply partners had experienced a disruption in the past year. Even worse, 12 percent of respondents saw half or more of their suppliers experience disruptions.

Shippers can take steps to reduce the frequency and severity of disruptions by fostering long-term collaborative relationships with their suppliers. A commitment to supporting vendors’ financial success and helping key vendors develop richer capabilities has helped many organizations reduce disruption risk.

Ensuring Vendor Viability

Last year, AMR Research profiled a shipper who used spend analysis to rationalize payment terms. During this process, the $3-billion manufacturer discovered a set of strategic vendors whose financial risk profile suggested they would struggle with the manufacturer’s new extended terms.

The manufacturer worked with its vendors to secure third-party financing that would support a viable working capital model for both parties. Supporting these types of win-win scenarios helps create healthy and stable vendors.

In transportation, letting carriers propose custom lane bundles and other economies of scale unique to their operation can uncover savings for shippers, while filling the carrier’s business needs. Many carriers report an increased desire to participate in bids and RFPs that allow them this flexibility because it helps maximize profitability on a particular shipper’s account while still charging competitive rates.

Developing Capabilities

Helping suppliers develop their capabilities, whether through process improvements, capital investments, or other opportunities, is one of the most effective ways to manage supply risk. Engaging in joint improvements signals both parties’ commitment to their commercial agreement. It also allows shippers to create visibility and reduce risks during production or delivery.

Choosing the right areas to make investments, however, can be tricky. During the supplier selection process, innovative companies have begun asking vendors not just about their current capabilities, but about future capabilities and the cost to bring that capacity online.

Using optimization techniques, buying teams can quickly analyze the costs and benefits of making such an investment in a key supplier.

For example, a carrier might propose existing volume for over-the-road shipping, but also indicate additional capacity provided by purchasing new equipment. Shippers can then use optimization techniques to evaluate and compare potential buying scenarios to determine the cost, timing, and savings of the various options.

Remaining open to this sort of additional investment allows businesses to save money in the long term, and create “dedicated bandwidth” in the short term, thus reducing the risk of interruptions.

The very nature of risk makes it impossible to ensure you will never experience supplier disruptions. But, by making a strong commitment to developing lasting collaborative relationships with your most strategic vendors, your company can create the visibility and control needed to ensure you’ve taken precautions against risk.