|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.
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.