The O-Ring in Your Supply Chain

Whether political perils arise far afield or close to home, the consequences for your supply chain can be catastrophic. Here's how finance executives can manage the risk.

Four Signs of Vulnerability

Rather than fixate overseas, however, U.S.-based managers might do well to start their analyses at home. The risk assessments should begin with an examination of their companies’ entire sourcing strategy to uncover those areas where political woes can hurt the most. “You look at your chokepoints, you look at your weaknesses,” says Diane Labrador, assistant treasurer for risk and insurance at Intel. “What would be the O-ring that would cause you problems?” she continues, alluding to the infamous cause of the Challenger shuttle disaster.

Here are four signs that a company’s supply chains are vulnerable to political risks, according to an August 2003 white paper by Aon:

  • Tight timeframes. While just-in-time manufacturing has enabled companies like Dell Computer to extract costs from their processes, it also leaves less room to maneuver when a supplier doesn’t come through. Not only might alternative suppliers bargain harder on costs, but the timeliness of the company’s product delivery might also be threatened.

When timeframes were stretched even more by border delays after September 11, some companies sought certification by the voluntary Customs-Trade Partnership Against Terrorism (C-TPAT). The certification, which requires a rigorous self-assessment of a company’s supply-chain security, provides company imports with a fast lane through Customs if they measure up.

Overall, it seems that the longer the time between securing raw materials and shipping finished products, or the larger the buffer of materials on hand, the less political risk in the supply chain. Too long a cycle time or too big a buffer, of course, and just-in-time goes out the window.

  • Custom designs. The more exacting the product specification, the less wiggle room for the manufacturer that must find a new supplier. To take an extreme case, a one-off product blueprint might require an alternative supplier to retool its own operations — a process that could result in months of delay and a drain on the manufacturer’s revenues.
  • One supplier. Like low-inventory strategies, the currently fashionable single-source doctrine increases political risk even as it adds to efficiency. But on occasion — say, when it’s harvest time for one particular fruit — it can’t be helped.
  • No geographic diversification. Relying on suppliers from just one country could result in devastating delays if, for example, war were to break out in the region. Penciling in alternative suppliers in different countries, but in the same region, might do no good; as the authors of the Aon study suggest, “a full-scale Korean conflict would likely disrupt production in much of Asia, at least for a time.”

Heading Off Shortages

After analyzing their exposures, companies can take a number of measures to head off supply shortages. A first, obvious step is simply to line up alternative suppliers. But companies aren’t out of luck even if only one supplier is possible, says Lisa Hauser, a supply-chain risk consultant for Marsh. A company should negotiate the terms of its supplier agreement so that if the pipeline is clogged, the company will receive priority treatment before other buyers.

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