Unless you are 100% vertically integrated (i.e., you own all of your suppliers as well as their sub-suppliers), you do not, in fact, have a supply chain.
What you have is a supply web, and if you’re working with any mode of transport, be it ocean, air, courier, road, or rail, you sit right in the center of it.
We are so used to representing our line of supply with the simple image of a chain, even though the notion of the “chain” actually being a web is not new at all. I was first introduced to it in 1997, by a senior executive in the company I worked for, on the 3PL side.
For those who want to dig really deep into the supply web concept, you can find some excellent research from Georgia Tech from 1999 by Hakimi et. al, here:
Why is a web more appropriate as a representation of your supply engine ? Why not just have your company in the middle of the drawing, and then draw individual lines to your main supplier of something, be it OEM or components ? Like a “supply sun”, perhaps ?
Because that’s not the way it really works, any more than it works like a chain. For example, if you do a very deep dive (which is time-consuming, requires lots of resources and constant updates which never end), you’ll almost certainly find that several of your tier 1 suppliers have multiple tier 2/3/4 suppliers in common! And now the risk of disruption to your business if a crisis should befall such a sub-supplier potentially just increased exponentially.
Those relationships to sub-tier suppliers constitute the lateral strands in your web; they’re indeed what makes it a web.
We all know (or should have learned by now) that single-sourcing is generally a no-good-very-terrible idea. But if you’re in procurement (whether of goods or services), and you switch to dual- or triple-sourcing, don’t pat yourself too hard on the back until you’ve done your homework on sub-suppliers and risk management. Switching to multiple sources is better than nothing, but far from perfect.
Return to the image of the web. If you have a chain and it snaps, then all the other chains in your “supply sun” remain intact, and you can focus on fixing the faulty one.
Anyone who has ever broken a spider web knows that this is not what happens when you break one of its strands! Depending on which one you cut, the effects are swift, and can be local or regional or global, as it were, and that’s precisely what makes the web such a powerful representation of a real company’s situation.
Some companies have realized this a long time ago and invested heavily in supply web mapping and monitoring, complete with control rooms straight out of a James Bond movie. They include electronics manufacturers, some chemical companies, and auto-makers especially. People who either have money to burn, or for whom the financial risk of a strand breaking outweighs the investment, or both. But as previously mentioned, such a set-up is expensive and permanent. It is not enough to run the update once or twice a year, nor is it an Excel-exercise.
You will also quite possibly find that at least some of your tier 1 suppliers are a suspicious bunch and are not nearly as interested in sharing this information as you are in getting a hold of it!
So, what can you realistically do, if you don’t have millions to burn, and you’re not big enough to force all your suppliers to reveal their sources, as it were?
- Segment and Prioritize It is immaterial whether a supplier is large or small. What matters is the impact on your business if they were to be shut down for any length of time. That time frame obviously depends on your inventory, and on your ability to source elsewhere.
- Identify and change. Unless they are very easy to replace (commoditized and widely available), change single-source suppliers to dual- or triple. Be careful, though: “widely available” and “commodity” refer to the current state of affairs. However, when a crisis hits, your competitors or other companies that use the same component or service may also jump on those alternatives, and that “commodity” product all of a sudden becomes a premium one. Container shipping space and air freight uplift in today’s environment are excellent examples!
- Consider changing terms. Make supplying to your company conditional on providing details of tier 2 and 3 suppliers. In container shipping you might not be terribly interested in whom a carrier sources its vessels and stores from, but you’ll be very interested in the alliances and slot charter arrangements they are part of. As an example, Cosco, CMA-CGM and OOCL all had boxes on the Ever Given, because they belong to the Ocean Alliance together with Evergreen. For that reason, all alliance members count as Tier 2 suppliers to each other, at least on the trades where the alliance is active.
- Find risk- and opportunity points. List suppliers who share tier 2 and/or 3 suppliers, and list as risk. Then, identify suppliers who are using tier 2/3 suppliers for components similar to other suppliers who are not using them.
- Obtain buy-in to your proposed strategy with senior management. This will quickly turn into a cross-functional exercise, and you’d do well to not even start the exercise until there is agreement internally. When the strategy is eventually complete, the presentation to management likewise needs to be a cross-functional event. Not least because it is highly likely that increased up-front cost will be on the table, and such a decision always causes wrinkled brows in the boardroom.
- Share and negotiate. Make sure you share your findings with your suppliers. This can get tricky and legally hazardous, so make sure you involve Legal before going down this path. Also, some tier 1 suppliers may try to renegotiate prices on the basis that they are being forced to use a more expensive tier 2/3. Same reason you (foolishly) single-sourced from some of them, so be prepared to compromise. Your goal is to eliminate a risk that can very quickly cost a lot more than a few cents in piece price.
All of the above steps apply equally whether you’re a buyer of logistics services, components, finished products, or tooling.
Selling risk management internally can be hard. You are, after all, trying to persuade your management to “pay it forward”, and in a supply web environment, crises are not easy to see coming.
Trying to manage risk can at times feel like living the famous metaphor of being “a blind man in a dark room, looking for a black cat that isn’t there”. Crises have a way of either setting in suddenly and catastrophically, alternatively evolving so slowly that everyone, while they can see the potential risk, writes it off as minimal - until it isn’t. At that point, it will, naturally, become your fault…
The former would, in the shipping world, include the tsunami/earthquake in Japan, the Ever Given, fires, collisions, sinkings, floods, and last-minute blank sailings. Lately Covid has been added to the list in e.g. Yantian, where the impact to potentially thousands of supply webs far eclipses the impact of the Ever Given.
The latter would include events such as the Hanjin bankruptcy, major labor disputes, and bad weather-seasons.
Your point to your management needs to be that while crises rarely pop up in the same place, they invariably pop up somewhere, year in and year out. Be armed with examples, preferably from your own or comparable companies.
Remember that even though it’s still not easy, you have the benefit of the last year’s developments currently being top-of-mind with your executive suite. Supply web management has all of a sudden been catapulted on to the front pages of business newspapers and television.And, as they say, a crisis is a terrible thing to waste!