When you think about supply chain risk mitigation, what are the first things that come to mind? For us, the usual suspects are:
- Controlled costs
- On-time delivery
- Freight utilization (proximity and load efficiency)
- Quality control
- Correctly designed packaging
These things are Supply Chain Management 101. Standard operating practices. But if you really want to protect your supply, your vendor needs to go above and beyond 101 SOPs.
The Most Important Aspect of Supply Chain Risk Mitigation
Long-term, dynamic supply chain management can’t coast on the basics. It requires advanced planning, optimization, and reviews.
It requires regular, recurring, formal communication about the entire supply system. Communication on system status keeps you in the know and your vendor on track. It helps you both identify opportunities and mitigate risks before they arise. Surprises can be costly!
Not every vendor will have the expertise or desire to go the distance. A high-quality vendor will know how to track the following information and report on it regularly as a best practice. You shouldn’t have to harass your vendor for this info.
1. Raw Material Pipeline and Cost Reviews
In order to protect supply, vendors need to have raw material stock planned in advance.
Normally, planning combines consumption and expected lead-time for replenishment of the material. However, as we all know, both of these areas are extremely dynamic. This necessitates a well-designed measuring system and constant attention.
The last thing you want to hear is: “We bought too much material. Can you please pay for it?”
Even worse than that: “We ran out of material, and they’re telling us four more weeks to receive it!”
Reviewing raw material cost well in advance of changes (either up or down) is also important. You need time to pass changes through your organization.
2. Raw Material Market Influences
What affects the costs of raw materials? Periodically taking stock of risk factors ensures you’re buying materials at optimal market costs.
There are a number of factors that affect the raw material market:
- Global supply movement
- Availability & shortages
If any of these change drastically (or look to change in the future), your vendor should be able to communicate and advise you accordingly. Joint decisions and actions are critical when reviewing potential market changes.
3. Inventory Status
If you’re working with a high-quality vendor, they likely offer inventory management. That means they have insight into your physical supply status and inventory movement. Those who stress frequent feedback from the point of use will provide the best results.
For project-based businesses, these regular supply system reviews provide the most value since demand is erratic.
A high-quality vendor can report on your inventory at any point in time, and make supply or safety stock changes based on your short-term needs.
4. Actual Product Consumption vs. Forecast
Actual consumption of product is constantly changing (in predictable patterns, or based on the whims of the consumer). Even with products that have a specific window of use, all consumers will use and interact with the product differently. Seasonality will also affect needs - that protection will be built in.
So, although forecasting is an imprecise art, it’s a crucial starting point for managing stock and costs.
If you can provide some type of a consumption forecast, your vendor can get started immediately. However, a good Supply System Manager will initiate a “Consumption Profile” on their own. Soon, they’ll be able to anticipate your needs (perhaps even before you do)!
The Supply Manager will also prevent mistakes, and may even vet your purchase orders. It can be extremely valuable to have someone say, “Are you sure you need this?” (MRP/ERP-generated orders have been wrong on occasion!)
No matter what, your vendor shouldn’t struggle to meet inconsistent demand. If they manage inventory and JIT practices well, you should never have to fear shortages or major surplus (which can also increase costs).
5. Process Transparency
Your product is your baby. You should know it’s being produced, fabricated, tested, and packaged to your standards. You probably don’t need details - but you might be interested in the employee environment, environmental challenges, or whether certain components are outsourced.
An open door policy is the best for both customer and supplier, and allows for periodic visits back and forth to keep the system, communication, and visibility current and accurate.
6. Upcoming Design Changes
Have you ever been surprised by a change in product design? Did you end up with too much finished inventory or raw material as a result?
This situation is all-too familiar for customers AND suppliers. The only way to prevent this is to have a recurring agenda item that discusses upcoming engineering changes and product life cycle status.
Again, it’s not enough for your vendor to conduct these reviews and audits internally. They need to include you in the process so you can stay ahead of what’s happening, not behind it.
Communicating as partners is key for proper supply chain risk mitigation.
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