Successful stock investing strategies have long included developing a diversified portfolio of assets to reduce overall investment risk. As with mitigating risk in your investment portfolio, mitigating risk in your supply chain can be accomplished by ensuring your suppliers and their suppliers are different companies having a host of different risk profiles, thus reducing your overall supply risk. A thorough approach to improve visibility across your supply chain, especially at the Tier I, II and III supplier level, will reduce your organization’s supply chain risk. OEMs must collaborate more closely than ever with their Tier I, II, and III suppliers to identify, optimize, and manage ongoing supply risk within their supply network so that all tiers of their supply chain can prosper.
Our research has highlighted that companies need to significantly enhance communication, collaboration, and visibility within their supply chains in order to remain competitive with the increasingly complex, fast-paced, and global supply chains of today. Further we have uncovered that companies lose millions, and in some extreme cases billions, of dollars annually when issues in supply chain communication, collaboration, and visibly arise and result in supply chain disruption. Leading OEMs often have an excellent understanding of their Tier I suppliers. However, our experience has shown us that supply disruption events, whether it be: financial, operational or other, often impact Tier II and Tier III suppliers first and have a devastating impact on the entire supply network when they occur. Unfortunately, companies are faced with a growing list of challenges that often leads to supply chain visibility being de-prioritized.
What is Supply Chain Visibility?
Going beyond the buzz word, true supply chain visibility is a robust strategy that allows organizations to proactively manage supply risk and react real-time to supply chain disruption when it occurs. Global manufacturers have discovered they must move beyond simply spreading sourcing to different Tier I suppliers, as Tier I suppliers that source the same Tier IIs correlate the overall Tier I supply risk increasing the probability of a supply disruption. Leading companies have realized that they must employ a comprehensive supply chain visibility strategy that extends beyond the ﬁrm’s immediate Tier I suppliers and into the entire supply network to build a robust sustainable enterprise.
Step 1. Identify Tier II & III Suppliers & Highlight Risk
Attaining supply visibility at the Tier II and III level starts with closely partnering with your Tier Is. First, identify critical Tier I supplied items; modules, components, or raw materials, and ensure Tier I backup suppliers are in place. Once your Tier I supply base is de-risked, partner with your Tier Is to map out critical Tier II supplied items. It is important to outline the goals and anticipated benefits for each party to ensure full commitment. Identify overlaps in Tier II suppliers used by Tier I suppliers which add supply chain disruption risk by reducing diversification. Once Tier Is are outlined, conduct a review of Tier III supplied items in partnership with your Tier I and Tier II suppliers.
Step 2. Optimize Supply & Reduce Risk at the Tier II & III Level
Address going concern suppliers, those with financial, quality, or delivery issues. Going concern suppliers are the most volatile and have the highest probability of supply disruption. Second, address sole source Tier I suppliers by identifying backup suppliers. Once you map your Tier II supply base you may find your supply base resembles the bottom tip of a diamond as opposed to the bottom of a pyramid, indicating your Tier Is share multiple Tier IIs, resulting in higher risk. Lastly, address geographic centric supply locations to further de-risk supply. Weather, geopolitical instability, and currency fluctuations can cause disruptions so engaging suppliers in different regions can further de-risk your supply chain.
Step 3. Manage Ongoing Supply Chain Risk
Develop a Supply Chain Visibility Strategy which outlines the actions that your team will follow if a supply disruption occurs. The severity of many common supply disruption events can be mitigated with proper planning. Establish Supply Chain Visibility review meetings monthly with your Tier Is until your supply chain is de-risked to acceptable levels. Assign team leads to specific types of disruption events, and then document backup suppliers, contact information, and typical lead times. Focus on delivering value throughout your supply tiers to simulate a culture of trust. Information sharing often uncovers challenges that OEMs should collaborate with their suppliers to resolve to drive long term mutual value creation.
Our research has highlighted that it is often Tier II and III supplier challenges that cause the most supply disruptions at the OEM and Tier I level. Tier II and III suppliers are more resource constrained so having an excellent understanding of their operations and being prepared to support them as needed will strengthen your supply chain at all tiers. As with any sound investment strategy you need to be actively involved and knowledgeable about your portfolio and your suppliers. You must proactively collaborate with your Tier Is as an extension of your enterprise to continuously review and refine your supply base to ensure long term sustainable success.