Managing supplier risk top priority for OEMs

A study conducted by KPMG International and produced in collaboration with the Economist Intelligence Unit, surveyed 196 senior executives worldwide to under how the supply chains of industrial manufacturing firms are shifting as a result of the downturn. One key finding stood out in the survey’s results:  Management of supplier risk has become more hands-on as a result of the downturn, but by avoiding certain risks, companies may be losing out. The recession has also caused companies, as one interviewee puts is, “to sharpen our pencils” on supplier risk. In some areas, however, the tendency seems to be to avoid potential problems altogether, or diversify around them, rather than to understand the risk, the study noted.

There were some rather interesting responses to this survey—ones that might, or might not surprise suppliers. While KMPG notes that survey respondents “recognize that current arrangements have weaknesses,” supply chain management “has always been about obtaining necessary inputs and distributing outputs at the lowest possible cost.”

When asked, “Regarding your supply chain as a whole, which of the following are the most important attributes?,” Cost was by far (66%) the leading attribute of their supply chain, and Cost Uncertainty “the most common concern about suppliers” (48%).

Quality came in second with regard to the question of the most important supplier attributes (57%). Reliability (on-time delivery) of their suppliers came in at 49%, and Flexibility came in at 41% as the most important supplier attribute.

It reminds one of the old saw of a supplier telling a customer that the supplier can provide price, quality, and on-time delivery.  The customer can “pick two.”

Given the above responses, it won’t be a big surprise that only 46% of the respondents ranked “Quality” as a top concern today when considering supplier relationships. If just over one-half of the respondents consider “Quality” an important attribute of their supply chain, it’s obvious that quality will be a concern.

While many suppliers in the U.S. make it a priority to promote “manufacturing in the USA,” in large part because of the ability to protect an OEM’s intellectual property (IP), that’s not such an important factor with industrial OEMs. Only 22% say that IP protection is a top concern today.

Low on the list of concerns is “Supplier suddenly closes down.” Only 10% of the respondents say that this is a top concern today.

Developing Strategic Relationships:
KMPG’s study notes that a primary method that companies are using to strengthen their supply chains is by developing closer, longer-term relationships with a select group of suppliers. In fact, 41% of the respondents said this is a strategy that it will develop over the next two years.  Along with that, 39% said they plan to decrease the number of suppliers globally. Another strategy that industrial OEMs are planning for the next two years is strategically selecting suppliers that are located in or near its target markets —37% responded with this strategic plan.

Mitigating Risk:
It’s no surprise that for some industrial OEMs, supply chain managers have had to deal with many issues. The main risk focus during this past recession has been “supplier financial risk.”  The KMPG survey reveals some steps that these global industrial OEMs have taken over the last two years, which include:
 
•    80% of respondents now include financial reporting requirements in purchase orders
•    75% of respondents now have line stoppage agreements in contracts
•    68% conduct plant tours of suppliers
•    67% conduct product quality monitoring
•    66% review supplier risk annually or more often
•    54% conduct extensive supplier due diligence
•    51% actively monitor and audit the financial health of key suppliers to avoid risk of abrupt removal of one of their top two or three suppliers
•    40% are considering bringing back in house parts of the supply chain that have been outsourced

Twenty-four percent of the respondents surveyed say their strategy includes bringing more of the supply chain in-house, obviously for greater control of specific activities. For example, Leggett & Platt, a conglomerate that includes bedding, commercial vehicle products and vehicle seating units, re-established a logistics operation in the U.S., rather than rely on contractors. As KMPG’s study pointed out, “this may be a strategy worth considering for companies that are seeking greater control or believe that current potential partners involve too much risk.”

The interesting aspect of all of this, as the study points out, is that as OEMs put more and more responsibility on their suppliers, the risk to the OEMs increase.  Helping their suppliers financially to keep them in business is something that we’ve seen during this recent recession. It’s an extended view of the “partnership.”  Philips NV and Rolls-Royce both used their own financial strength to provide financing facilities so that their suppliers could get easier access to payments, said the study.

Outsourcing Risk:
Outsourcing has its risks, and offshoring has some major risks that U.S. manufacturers believe give them an edge in the outsourcing game. Intellectual property theft has become a huge issue, particularly in China where problems persist. In a separate study by the Economist Intelligence Unit of 1000 executives, some 57% consider China’s weak rule of law, notably poor IP protection, to be that country’s leading barrier to growth in the next decade.

However, the KMPG report points out that there are also risk benefits to near-sourcing, with 47% of respondents moving toward a business model where suppliers are kept close to manufacturing or assembly plants, in order to reduce supply chain risk.  For example, notes KMPG, “non-cost related transport issues—the distance of the supplier from the next stage of the supply chain and the reliability of transport—are leading supplier concerns for 28% of the respondents currently, and 37% expect at least one of these to be a major worry in two years.

“Near-sourcing also clearly brings benefits such as lower currently risk and greater security of supply,” the report said. “Nevertheless, it may not always be an option” as OEMs simply cannot avoid the all challenges inherent in a global supply chain.