Poor risk management threatens supply chain
James Morgan -- Purchasing, 6/3/2004 2:00:00 AM
As many supply managers see it, risk is fast becoming the weak link in their supply chains. Global events such as terrorist strikes, political instability in developing economies, the 2002 shutdown of West Coast docks, and the 2004 explosion in global metal prices have awakened managers to the importance of assessing and managing supply chain risks.
Ironically many of the new risks being cited by supply managers are the product of the cost reduction strategies that are sweeping business today. Supply base rationalization, global sourcing, and outsourcing activity are now being cited by a growing number of purchasing executives as the cause of malfunctions in their supply strategies. Managers and advocates of new supply strategies spent too much time and energy on selling new supply strategies to management and too little effort on evaluating their risk factors and making the necessary adjustments to implement them effectively.
For the most part, the supply chain risks cited by purchasing professionals in a recent Purchasing magazine survey can be sorted into four general categories: political, economic, terrorism-related, and "other." Judging from the importance placed on them by purchasing professionals, many of these risk factors are far from trivial (see chart). For example, Charles A. Schaum, director of purchasing at U.S. Filter in Warrendale, N.J., worries about the "financial instability" of some of his suppliers caught in a downsizing trend. Another survey respondent in the purchasing department at a New England textile firm reports struggling to replace a major supplier that is no longer available. And in a far different set of circumstances, Frank LaBletta, director of purchasing at Leone Industries in Bridgeton, N.J., has regulatory concerns about the risk of food security "as it relates to the Bioterrorism Act."
A few purchasing executives suggest that a far greater risk is building in the area of quality. As one West Coast electronics buyer puts it, risk is building because too few buyers seem to notice that their suppliers may be meeting demands by cutting corners, sometimes too sharply. Similar complaints are registered by transportation and logistics buyers who say their companies are being hit hard by fuel cost escalation and governmental regulation, especially in the area of sourcing hazardous materials.
Metals prices are one of the most immediate risks worrying buyers these days (steel mostly, but in recent months non-standard sizes and chemistry of nonferrous metals). Other product risk areas include plastics, flammable liquids (by virtue of many new regulations), paper and packaging, electronic components, hardware, leather products, and cutting tools. And some purchasing professionals are beginning to warn that fuel shortage risks are not being paid sufficient attention; instead, too much of the focus is on fuel price and not enough on availability.
The risks of this year are different from those of only five years ago, according to Purchasing's survey data. For Larry Meacham, vice president of quality and materials at Wiese Corp. of Perry, Iowa, foreign competition seems less intense today, while unstable raw material costs are a much bigger risk factor than a few years ago.
For A. Wesley Bailey, supply chain director at Grosman Corp. in East Bloomfield, N.J., the biggest change is machining capacity. Five years ago it was plentiful but not so today. "Now we have shortages and inflation on basic items," Bailey says. Many buyers also note the steep rises in freight rates over five years.
But for John Grove, vice president at a General Motors plant in Niles, Ohio, risk is a relative thing. He says today's economy is "the best ever" and his unit "maxed out productive capacity well before the bubble burst, before we had time to invest in new equipment."
While most of the purchasing and supply management executives surveyed by Purchasing say they are experiencing a significant increase in business risks, their actions often seem to belie their words. Responses seem to show that most executives charged with supply safety have been taking a relatively leisurely approach to their responsibilities.
And despite an apparent enthusiasm for dealing with a growing list of supply risk problems, only about a third of survey respondents seem to be actively involved in taking action. Among those actively expressing alarm, these are among the issues most favored:
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Greater use of long-term agreements with proven performance.
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Greater use of alternate suppliers.
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More use of forecasting and long-term planning sessions.
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Some (relatively slight) increases in inventory levels.
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Slight pickup of interest in commodity hedging (so far primarily in fuel and metals).
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