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Your supplier’s suppliers: the unseen dangers

Manufacturing and retail supply chains are now scattered like confetti across the globe. Major suppliers often rely on multiple tiers of other firms – up to 20 levels in some cases – to provide the materials and parts they need for a finished product, creating potential risks.

Many firms’ attempts at risk management focus only on their tier-​one suppliers, because identifying and speaking to suppliers’ suppliers and the layers beyond them is too difficult and time-​consuming. This can foster a dangerously false sense of resilience: for example, if multiple tier-​one suppliers share one or a small number of sub-​tier suppliers, this creates a potentially unseen weak link, vulnerable to concentrated threats like extreme weather events.

Many companies – and even entire industries – have been caught out in this way. For example, the Japanese earthquake and tsunami in 2011 disrupted the only supplier of a certain paint pigment used in cars, causing long production delays for automobile manufacturers.

In the same year, floods in Thailand forced PC makers across the world to cut back production, in some cases for months, because Western Digital, Toshiba and other major disk drive suppliers had heavily concentrated production in industrial parks around Bangkok that flooded. To make matters worse, a Japanese company that made around 70 per cent of the motors used in hard disk drives had also based much of its production in that area.

This type of sub-​tier sharing contributes to many unmanaged supply chain risks, according to a study by Jun Li and Ravi Anupindi of the University of Michigan’s Stephen M. Ross School of Business. The study highlighted the prevalence of single points of potential failure in the high-​tech manufacturing supply chain, with many companies relying on a handful of tier-​two semiconductor suppliers, for example. But these sub-​tier suppliers can be hard to identify and manufacturers rarely have direct relationships with them, says the study. Consequently, firms with more shared tier-​two suppliers have higher stock return volatility. To address this, firms need to increase visibility in their extended supply network, identify critical shared sub-​tier suppliers, and manage those risks, says the study.

The Business Continuity Institute (BCI) Supply Chain Resilience Report 2017 shows the size of the problem globally. According to the BCI, 34 per cent of continuity and risk professionals report that supply chain disruptions occur predominantly in tier two or lower. Yet a staggering 69 per cent do not have full visibility of their supply chains. One important step in avoiding sub-​tier concentration risk is to map the supply chain in as much detail as possible – all the way to tier 20 if necessary – and then try to foster relationships with each tier.

It can be a tough task. According to the Supply Chain Sustainability School (SCSC), the best initial approach is to talk to higher-​tier suppliers. This will likely require much sensitive communication and reassurance, due to commercial confidentialities. Risk professionals can then transpose this information onto a map of potential risks, such as extreme weather events. How far down the supply chain to map depends on the nature and idiosyncrasies of the chain and your assessment of risk at each level, says SCSC.

“If a company identifies a shared sub-​tier supplier with no alternatives, they have options,” says Charlie Maclean-​Bristol, director of PlanB Consulting. “They can try to negotiate exclusivity, to ensure that the company supplies them first. They could stockpile the product or pay the higher-​tier supplier to stockpile. Their accountants may not like that, but it could be worth it long-​term. They should also request an early warning from higher-​tier suppliers if they are aware of any sub-​tier issues.”

Bernie Donachie, managing director at consultant Protiviti, says: “Companies that are good at this use deep analytics to build a supplier profile for each tier, then measure and manage risks such as extreme weather, labour disputes, or social or economic considerations for each.”

If there are no other suppliers, companies could investigate alternative engineering approaches or technologies – considering whether they need a particular part or material or could use something else – along with the associated costs and the time required to set up the new option, he says.

“Building this framework as a result of disaster is more difficult,” advises Mr Donachie. “Be proactive, not reactive.”