As a result of global sourcing approaches, many of the classic methods for sourcing the corresponding supply streams, which were mostly managed within smaller areas like Intra-Germany or Europe, have long since shifted out to more distant regions. This is a trend that continues to this day, particularly in order to further minimize procurement costs in the face of ever-increasing competitive conditions.
However, this is also accompanied by an increasing complexity of business relationships, which is causing the necessary supplier management to be adapted as well as the establishment of proactive risk management. The aim is to rule out possible supply risks as much as possible from the outset and thus have the ability to maintain supplies in the long term, even in crisis situations.
Regardless of industry, location, or company size, organizations engaged in global sourcing become painfully aware during crisis situations of how susceptible they can be to supply-chain disruptions, which in turn can cause them economic damage.
How can companies act proactively and best prepare for disruptions in their supply chains? Furthermore, how can they minimize the damage that has already been caused by bottlenecks or gaps in the supply and limit the period during which they occur?
Differentiating Interruptions of the Supply Chain
An interruption of the supply chain requires a differentiated consideration – especially regarding possible countermeasures. Three cases apply here:
- Acute: the supply interruption has already occurred.
- Impending or latent: supply is still guaranteed but threatens in the very short term to become problematic.
- Potential: there are no acute supply bottlenecks, but due to the sourcing strategy (e.g., single sourcing) and the nature of the business relationship, interruptions are theoretically conceivable.
Scenario 1: supply-chain failures that have already occurred
For tool-bound components with a higher complexity and only one supplier, a solution is certainly not trivial, but it is also not impossible. However, the higher the demands on the product and the dependence on only one or very few suppliers are, the higher the effort and the transaction costs for corresponding alternative scenarios will be. To this end, each individual case must be examined in detail, and possible courses of action must be closely considered.
First, however, costs are incurred – including relocation or start-up costs and the costs for new tooling. Even a change of suppliers always causes additional work, for example, through necessary tests, release procedures, and more.
With the single-sourcing approach, companies have an active (B2B) contact for a component. Other potential suppliers or second suppliers for exactly this component had often not been considered for a long time and might have been phased out of the supplier portfolio. In such a situation, short-term access to alternative providers often proves difficult.
Unless appropriate measures were already initiated some time ago – usually as a result of decisions made long ago – this time factor is an opponent that can hardly be caught up with. It does not allow time-consuming market research to solve acute problems. At this point, experienced experts can intervene by actively steering the process, identifying necessary measures, and implementing them together with the actors involved in the process.
Scenario 2: a functioning supply chain with impending risk
Even in this situation, time is still short. Nevertheless, if the supply chain is still functioning, there is greater freedom for potential action, and more possibilities are available.
If companies recognize a latent risk, immediate action is required: an active risk management within the supplier management must be initiated, and all necessary measures must be triggered. Emergency scenarios with existing suppliers, but also with alternative sources of supply, are conceivable approaches.
Our many years of experience in strategic purchasing management show that in this situation, the status quo must be documented within the shortest possible time, and a suitable action program must be set up in a meaningful way. This includes a qualified analysis and classification of potential risks with downstream action options as well as implementation plans and suitable monitoring tools. The entire subsequent process should be accompanied by an expert, who is specialized in this area, while demonstrating to affected companies the many ways in which such events or their negative effects can be significantly reduced (as much as possible), if not eliminated, in the future.
The purchasing worlds have changed significantly over the years against the background of global sourcing. However, not every new idea or new measure that breaks with proven methods or functioning regulations has led to sustainable goals. Thus, strategic partnerships with suppliers – characterized, among other things, by an active, open and, as it were, partnership-based structuring of business relationships – have paid off in many crisis situations and served to preserve companies.
The operating conditions and rules of the impending-risk scenario are quite similar to those of the acute-failure scenario: the affected company will not be able to avoid drawing the “lessons learned” card from this situation and incorporating it into its current and also future purchasing philosophy and strategy.
Scenario 3: potential supply and delivery bottlenecks
In this scenario, the focus is not on the acute pressure to act anymore but, rather, on the strategic component. Possible risks and resulting effects in the supply chain must be anticipated at an early stage, allowing for suitable (counter) measures to be defined. Nevertheless, companies can act proactively to be well prepared in the event of impending or even acute supply and delivery bottlenecks, should they arise.
In clear terms, this means the risk potential of the supply chain from a technical, qualitative, and commercial point of view must be analytically assessed in good time. On this basis, the necessary package of measures must be defined and consistently implemented in good time before a real crisis situation arises.
This approach offers enormous potential for cost optimization – not only because impending costs for repairing incurred damages can be avoided as much as possible; positive effects, which are not only based on the purchase price but also on the total costs (TCO), are achieved in particular when a hedging strategy is initiated at an early stage and actively implemented by all process participants – inside and outside the company.
There are many aspects that are addressed during this approach, such as supplier selection, strategic supplier development, and risk management methods, to name just a few. This approach ultimately leads to a revision of the purchasing policy and strategy that is utilized in each case.
What questions are you currently dealing with that relate to this area? We’d gladly talk through these with you in a joint discussion. We look forward to hearing from you.