Sole source risk mitigation is a complex initiative for anyone to tackle and one of the most commonly battled beasts in supply chain management. As the adage goes, in this case, an ounce of preparation is worth a pound of cure.
As anyone who has spent time managing a complex supply chain knows, a great many factors can cause disruptions in the supply chain from a sole sourced component: natural disasters, finances, political unrest, or obsolescence, just to name a few. When, not if, this occurs with a sole supplier, there is little that any downstream operation can do in reaction. Preparation will be your greatest tool.
The following three steps will help you mitigate the risk of dealing with a sole source supplier.
Assess the durability of the supplier’s operations.
Before there is ever a hint of a problem, there are some facts you should know about your sole source: What is their financial condition? What is their customer concentration? Do they have an acquisition strategy? What is their disaster recovery plan? What unique capabilities do they possess to build my product? How many manufacturing facilities do they operate? How are their facilities spread geographically? Would the sole source be willing to license their product to another manufacturer in the event of an emergency?
In some cases, answering these questions might take some serious digging. It’s worth it. Information is power and being well-informed will be a great asset if any problems ever do occur. Understanding your supplier’s durability will also help you complete the next step to mitigating sole source risk.
Assess the potential impact of the supplier’s failure.
Create financial models for several scenarios. Political unrest might take a manufacturer offline for a few weeks. A natural disaster might stop production for months. Their bankruptcy could stop their production for good. What does the trickle down effect look like in each of these cases? What is the likelihood? What is the impact? What is the persistence of the problem?
Comparing the cost of the risks to the value your sole supplier is creating will help you create a compelling case for either keeping them in the chain, or going back to square one to find a work around.
If you’ve decided that there is simply no way to go forward without your sole source supplier, there is only one way to actively reduce your risks.
Keep additional inventory on-hand.
Before we go any further, I should caution you that when dealing with a sole source in your value stream, it’s not so much if a problem will occur, as when. And when those delays or failures do occur, the inventory that you have stored is all of the available product you will have for some time. Keeping larger inventories will give you more time to find a solution to the problem.
Bear in mind, holding greater than immediately necessary inventories isn’t an entirely bad situation. If you’re holding more, there is a good chance you can increase your order sizes which could give you a unit cost savings.
Don’t just minimize your inventory for cost purposes; use it for what it is meant for! Inventory is your main weapon against a breakdown in supply.
In the event that you are forced to use a sole supplier at some point in your value chain, ignoring the potential impact will be your greatest enemy. The fact that there is only one supplier should only highlight the importance of gathering as much financial and logistic information from them as possible.
After a problem occurs with a sole supplier, ”scrambling” will be all that you are able to do to improve the situation. Proactively preparing your supply chain and keeping your head in the game will ensure that another company’s problems do not impact your success!
Written by Philipp Odette, Global Supply Chain Solutions (GSCS), 26 February 2013.