For several years, China and the Far East have been considered the best bet for outsourcing manufacturing due to lower labor costs and fewer regulatory barriers. Most companies choose these suppliers to reduce costs, but several disadvantages can make overseas suppliers risky in the long run. Most companies focus on tier 1 suppliers, their direct suppliers. When something goes wrong with their suppliers’ supplier, the issue doesn’t become apparent until the materials fail to arrive. When these problems arise, the distance between your company and the supplier compounds the delay. Suppliers are vulnerable to unexpected disasters, such as the Tohoku tsunami or Fukushima nuclear accident, which pose impossible to anticipate obstacles. Finally, rampant counterfeiting in the global supply chain makes it difficult for U.S. companies to ensure the quality of their products. When you work with an overseas supplier, the occasional hiccup is almost inevitable. But when you have a solid process to follow, the issues are much easier to resolve.
Reacting When the Chain Breaks. Here are some tips for coping with these issues and preventing them in the future:
Understand the root cause of the problem. Run a complete analysis of the processes in place to gain a practical view of the logistics systems and business risks.
Develop a stabilization plan. You can’t fix things overnight, but corrective action plans should implement improvements within 8 to 12 weeks. Use performance-tracking metrics to measure improvements. Enterprise resource planning may be used in the short term to focus on customer requirements.
Ensure that roles are clear. Sometimes a growing business faces shifting responsibilities, which can cause employees to lose clarity regarding their tasks. Establishing management discipline through regular meetings and structured reporting helps achieve consistency and responsibility among your team.
Visit the supplier or manufacturer. If problems arise constantly, send someone to the manufacturing site to investigate further and gain knowledge about possible inefficiencies or poor communication practices. Decide whether you can rely on continued service or need to look for a different supplier.
Preventing Recurrences. Dealing with these issues the first time can be harrowing. Consider some strategies to avoid repeating the experience. Use an Excel spreadsheet (or a more sophisticated system) to track and match customer orders, confirmations, and receipts. Set alerts to warn you when supplier shipments deviate from expectations. Communicate regularly with your suppliers, calling overseas suppliers at least twice a year and visiting suppliers that are close by. Determine minimum inventory levels based on worst-case supplier downtime, and establish alerts when supplies drop below these levels.
Are the Savings Worth It? The temptation to save now (and risk crises later) is appealing to some companies. Here are criteria to assess whether it’s worth it to your business. It’s worth saving when cost-reduction measures related to material or design changes are validated by customer requirements; when you’ve established milestones to ensure there are no supply disruptions during launch or ramp-down phases; when defined metrics and contingency plans can provide early warnings about supplier or product changes.
It isn’t worthwhile when a cost-reduction initiative cannot be validated due to a lack of proper documentation; when a new product can’t be produced due to the cost reduction; when old products run in low supply, forcing expedited delivery of the old products; when reduced material ordering doesn’t meet requirements.
Evaluate the Chain, Even if You’re Small. No business is too small to reevaluate its supply chain. It’s a good idea to establish a scorecard tailored to clearly defined performance targets and use it to evaluate each supplier. Semi-annual audits and scorecard evaluations can help you objectively evaluate whether old suppliers still offer a worthwhile partnership for your business. Suppliers with the potential to save your company money are tempting, but these solutions may have unintended negative consequences. Small businesses are usually hit the hardest when the supply chains fall apart. But you can use solid strategies to address these problems when they arise and prevent future occurrences. It’s important to constantly evaluate your options for suppliers to improve your company’s stability and manage your supply chain effectively.
We thank Ambrose Conroy, the founder of Seraph, for these ideas. Seraph works with clients to transform, relocate, or restructure their business operations.