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Skin in the Game: A Collaborative Approach to Identifying Supply Chain Risk

Transparency and visibility are critical to the effective operation of supply chains, and manufacturers and suppliers share a great deal of information in order to increase efficiency and predictability and, ultimately, get materials and products to the right place at the right time. But that type of collaboration often falls short in one key area—the identification of risk.

Typically, manufacturers are highly diligent when it comes to asking suppliers to share data about costs, schedules, and lead times—but very few apply the same sort of rigor when it comes to requiring information about upstream supply risks. They may hope that suppliers give them that information, or they may try to find it on their own, but they rarely press suppliers for it. As a result, there is an increased likelihood that disruptions will catch them by surprise and that they will be forced to react to problems rather than prevent them.

That approach is becoming less and less tenable. As a report from McKinsey & Company notes, we are now “operating in a world where disruptions are regular occurrences. Averaging across industries, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll.”

The “Push” Approach

Manufacturers can address this by establishing a disciplined process in which suppliers proactively “push” risk information to manufacturers, rather than waiting to be asked for it. That means that contracts and RFPs should require suppliers to provide information on potential issues with obsolescence, sourcing, sustainability, and compliance for the manufacturer’s mission-critical products and components. The point is to ensure that suppliers have some skin in the game, and a clear responsibility for scanning the horizon for risk.

This process should also include mechanisms that make sure that this supplier risk information is fed to the appropriate people and functions within the manufacturer organization. This should include product and engineering teams, who can use that information to modify designs to mitigate the identified potential risks. Internal teams should also communicate closely with suppliers to provide guidance on specifications and streamline the authorization of alternative components to help reduce risk.

Mutual Benefit

All of this will require fundamental change in the traditional relationship with suppliers, and that may make suppliers uncomfortable. Therefore, it’s important to remind them that the increased responsiveness to risk that this process will bring will benefit them and the supply chain as a whole, as well as the manufacturer. And it will them help build higher levels of trust that strengthen their relationships with their customers.

This process is not, in itself, a cure-all for supply chain risk, and manufacturers will still need formal internal processes for evaluating these risks using a broad range of data and mechanisms to ensure that senior management can monitor risk. But the flow of supplier information can support those internal processes. Suppliers are, by definition, in a better position to see upstream risks—and in essence, this approach lets manufacturers tap into that perspective to extend their “risk perimeter” further out from the organization. Moreover, in the event of an unavoidable disruption, the shared understanding of risk and the increased levels of trust will put suppliers and manufacturers in a better position to work together to recover, thereby enhancing the resilience of the supply chain.

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