External Factors That Impact Supply Chains
For several years, China and the Far East have been marketed as the smart bet for outsourcing manufacturing due to lower labor costs and fewer regulatory barriers. Most companies choose these suppliers to reduce costs, but there are several disadvantages that make overseas suppliers risky in the long run.
Most companies tend to focus on tier 1 suppliers, meaning their direct suppliers. When something goes wrong with their suppliers’ supplier, the issue doesn’t become apparent until the materials fail to arrive. When these problems arise, the distance between your company and the supplier compounds the delay.
Suppliers are also vulnerable to unexpected disasters, such as the Tohoku tsunami or Fukushima nuclear accident. These pose obstacles that are nearly impossible to anticipate.
Finally, counterfeiting runs rampant in the global supply chain, making it difficult for U.S. companies to ensure the quality of their products.
When you work with an overseas supplier, the occasional hiccup is almost inevitable. But when you have a solid process to follow, the issues are much easier to resolve.
How to React When the Chain Breaks
Here are some tips for coping with these issues and preventing them in the future.
- Understand the root cause of the problem. Run a complete analysis of the processes in place to gain a practical view of the logistics systems and business risks.
- Develop a stabilization plan. You can’t fix things overnight, but corrective action plans should aim for implementing improvements within 8 to 12 weeks. Use performance-tracking metrics to measure improvements. Enterprise resource planning may be used in the short term to focus on customer requirements.
- Ensure that roles are clear. Sometimes a growing business faces shifting responsibilities, which can cause employees to lose clarity about their tasks. Establishing management discipline via regular meetings and structured reporting helps achieve consistency and responsibility among your team.
- Visit the supplier or manufacturer. If problems arise constantly, send someone to the manufacturing site to investigate further and gain knowledge about possible inefficiencies or poor communication practices. Decide whether you can rely on continued service or need to look elsewhere.
How to Prevent Recurrences
Dealing with these issues the first time can be harrowing. Consider these strategies to avoid repeating the experience.
- Use an Excel spreadsheet (or a more sophisticated system) to track and match customer orders, confirmations, and receipts.
- Set alerts to warn you when supplier shipments deviate from expectations.
- Communicate regularly with your suppliers. This means calling overseas suppliers at least twice a year and visiting suppliers that are close by.
- Determine minimum inventory levels based on worst-case supplier downtime, and establish alerts when supplies drop below these levels.
Are the Savings Worth It?
The temptation to save now (and risk crises later) is appealing to some companies. Here are a few criteria to assess whether it’s worth it to your business.
It’s worth saving when:
- Cost-reduction measures related to material or design changes are validated by customer requirements.
- You’ve established milestones to ensure that there are no supply disruptions during launch or ramp-down phases.
- You’ve defined metrics and contingency plans to provide early warnings about supplier or product changes.
It isn’t worthwhile when:
- A cost-reduction initiative cannot be validated due to a lack of proper documentation.
- A new product can’t be produced due to the cost reduction.
- Old products run in low supply, forcing expedited delivery of the old products.
- Reduced material ordering doesn’t meet requirements.
Evaluate the Chain, Even if You’re Small
No business is too small to reevaluate its supply chain. It’s a good idea to establish a scorecard tailored to clearly defined performance targets and use it to evaluate each supplier. Semi-annual audits and scorecard evaluations can help you objectively evaluate whether old suppliers are still a worthwhile partnership for your business.
Suppliers that have the potential to save your company money are tempting, but these solutions may have unintended negative consequences. Small businesses are usually hit the hardest when their supply chains fall apart.
However, there are several strategies you can use to address these problems when they arise and prevent future occurrences. It’s important to constantly evaluate your options for suppliers to improve your company’s stability and manage your supply chain effectively.