'Tis the Season to be Risk Free

Don’t you find that the holiday season seems to start earlier and earlier each year? By the beginning of November the shops are stocked full of toys, games and gifts and the television is full of adverts. Planning for the season certainly begins earlier for the retailers and manufacturers who learned a hard lesson when they found their products sitting on ships waiting to be unloaded because of the gridlock at the Los Angeles and Long Beach ports in 2004. In the middle of all this are Mattel, who have just undertaken a massive recall involving millions of toys due to quality issues with their manufacturing partners in China. These examples highlight the need to control your supply chain – especially challenging for those who have outsourced the manufacturing to low cost centers of the world.

And of course Mattel is not an isolated case. There have been many other high profile cases recently including the likes of Nike, Gap and Ericsson. In this article we want to explore some of the risks that can be present in extended supply chains and offer a couple of lean based techniques that might be considered in order to assist in mitigating risk.

The risks

The rising demand of globalization, creating a presence in emerging markets, sourcing from low-cost countries has elongated the supply chains. They (supply chains) are now vulnerable to a wide array of risks that can disrupt the flow of goods and information.

Supply chain risk can refer to any unpredictable event which affects one or more entities within the supply chain and negatively impacts a its ability to meet its objectives. These entities can be an organization’s facilities (manufacturing plants and warehouses/distribution centers), its suppliers, supplier’s supplier, and logistics and service providers. The risks can be categorized in the following way:

Supply Chain Confidence

Often times, our own drive to cut down costs, remove supply chain redundancies, eliminating waste and making supply chains leaner increases vulnerability to operational risk factors. So if you outsource, how confident are you that you have a solid supply chain? Are there robust processes and controls in place? How can you be sure that next time, it won’t be you with the issue?

Possible Solutions

So what are the possible solutions? Well, one solution is to wade against the tide and not offshore. A great example of how successful this strategy can be found at Honda and Toyota in North America. Traditionally, within the North American automotive market, the approach to managing the supply base has involved quoting the various suppliers on a very regular basis, looking for and focusing on the cheapest piece part price. Eventually, when the suppliers were unable to reduce the piece part cost sufficiently without going out of business, the auto-makers looked east for cheaper unit cost. Honda/Toyota enter the market dismissing the example of the American auto makers. Their approach is to select local suppliers and work very closely with them in a very collaborative way. The aim is to build a close relationship with their suppliers, in Japanese called keiretsu – a close relationship where the customer and suppliers all prosper together in a lean supply chain.  Within this relationship there is not only a focus on cost and waste removal, there is also the ability to ensure that risk free, reliable and solid supply solutions are implemented – in a way that is cost effective for both parties.

Toyota and Honda know what price they wish to pay, they accept the need of the supplier to make a profit and therefore they understand the cost target to make the product. They then work very closely with the supplier to meet these cost objectives while maintaining technical and quality standards. Very often within the keiretsu relationship, a representative from Honda/Toyota will become resident within the supplier in order to fully understand the methods and processes followed by the supplier. And what do the suppliers think about the arrangement? Most suppliers believe that Toyota and Honda are the best (and toughest) customers.

However if you do decide to offshore to a low cost region, there is another lean technique that could be used to assist us. This is a technique called "Plan For Every Part" (PFEP). Initially, for many companies learning about Lean manufacturing, understanding the value to be gained from the concept of PFEP can be hard.

The process requires the collection of a significant amount of supply chain data for all the parts that are sourced. This ranges from  the name and address of the supplier, physical size and weight of the part, pack, case and shipment, shipping methods etc through to the all the data associated with the internal use of the parts, such as how the part is fed to the line, in what quantities, how frequently etc. The list is extensive and the tools required to store this data can become considerable in size and complexity. There is then the challenge of maintaining such a large amount of data. For many, this seems like a great deal of work and effort, with not an apparent benefit to show.

Having implemented a lean manufacturing system, many internal benefits become clear, one of which is to assist companies in making sure that the right choice is made with regard to each part. As part of the process, risk can be considered, and specific pieces of data can be incorporated These could cover the categories as outlined earlier in the article,  It drives companies away from the blanket "one size fits all" strategy and allows for a strategy to be created for each item. This way risk can be assessed, measured and appropriate actions taken or planned.

Does it cost money to develop the PFEP process in a company? Is it labor intensive to collect the data and then maintain it? Is it difficult to implement a process with no apparent short term payback? The answer to all these questions is a resounding – Yes. However is it far more expensive to clean up a mess after there has been a catastrophic failure within your supply chain.  So can you sit comfortably in your armchair during the holiday season, sure in the knowledge that your supply chain is risk free? If not, seize the opportunity with a New Years Resolution to leverage Lean techniques and reduce supply chain risk well ahead of the next holiday season.

And how can you measure supply chain risk? For that you can read the article "Supply Chain Risk Measurement" featured in this issue of KNOWledge.