Image courtesy of Hasbro |
StrategicSourceror has discussed risk management & analysis at length lately, often in very objective, theoretical ways. Here's a quick look at how supplier management can help qualm some of the negative impacts of taking risks, in very real, practical ways, albeit through a hypothetical situation.
Bob runs a manufacturing business, in which he has been
making boutique soaps for the past 15 years. To make his soaps, he uses five or
six ingredients per scent through a process requiring only the melting, mixing,
and pouring of the ingredients into molds, where the bars are then cooled
before they are wrapped and shipped. With each truckload of soap sold, Bob has
enough money to pay his overhead with a little profit left over which he
directs to marketing. Bob’s facility is not running at full capacity and he is
interested in taking on new clients.
A major chain sees Bob’s soap marketing and is interested in
carrying his products. The retailer tours Bob’s facility, looks at his
financials, and sees that Bob manages his facility well and that he has enough
excess capacity to handle their orders. The two parties reach an agreement,
with the major chain negotiating Bob’s prices down to a very slim, but still
profitable, margin and establishing a strict set of protocols for delivery.
This is pretty standard, right? These situations and agreements happen every day around the
world. It’s how business is done and how small businesses start to grow and, to most observers, it appears to be a fairly boring and low-risk arrangement. But let’s look at some of the unknown risks that
could negatively impact this relationship and both parties financial standing.
Disruption of the
supplier’s supply chain
Bob’s business only requires five or six ingredients, but
they each come from separate suppliers. Due to the quantities he’s historically purchased, Bob’s soap company never buys each product from more than one supplier, most of which are small businesses themselves. The shuttering of any
of those suppliers – the owner falls ill, financial difficulties, or any of the
other myriad reasons a small business can fail – has Bob scrambling to find a new
supplier to meet deadlines. The hastiness causes higher product rates and rush
shipping charges, putting Bob in the red on the major chain’s orders, putting
his business in a downward spiral it can’t recover from.
Capacity Clamps
During the major retailer’s audits of Bob’s business, they
confirmed the increase in production would not put Bob’s soap company over the
machinery’s capacity. What no one knew is that Bob’s boiling & pouring
machine’s capabilities were “perfect world” scenarios, with actual results
nowhere near stated capacity. Faulty products are produced and shipped before
the product is noticed, impacting the major retailer’s reputation, causing large
chargebacks and wastage on Bob’s end. Add to that Bob’s need to slow production
and add a second shift, and there are unrecoverable heavy losses, downward
spiral, wash-rinse-repeat.
Shipping Policy Issues
To keep its logistics in order, the major retailer has a
detailed policy for shipping products from its suppliers to its distribution
centers. The document is lengthy, and has been amended and edited repeatedly,
and is now vague and confusing in some critical answers. Because the major
retailer is so large, the shipping account representative resolving these
issues is not the one on the receiving floor, nor are they in good contact with
them. Shipping penalties are assessed, products refused, and relationships
sour.
Each of these situations where an unknown springs up is
purely hypothetical, but not outside the realm of possibility. In fact,
situations similar to them happen all the time. In each and every one of them,
an unknown risk springs up causing negative effects, almost always resulting in
harm to one or more of the parties. In some cases, it causes Bob’s closure,
leaving the major retailer high and dry on products it has spent money
marketing and dedicated shelf space towards, resulting in profits lost from
competing products that could have used the space. As it happens, in each of these situations, the damage could
have been mitigated or outright avoided had both sides worked to promote their
supplier relationships. Better communication could have provided a buffer in
time so Bob could better resolve his own supplier issues and diversity, offered potential
resolutions regarding the capacity gaps and faulty products and their impact on the major retailer and Bob's deadlines, and also resolved the
shipping practice discrepancies.
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