on
Creating security of supply in supply chains
on
Disruptions in the supply chain are painful for every company, sometimes even threatening. Nevertheless, supply security projects are far too rarely at the top of the agenda. In this article, an internationally experienced supply chain expert describes how you can make your supply chain less susceptible to crises and significantly reduce costs through clever purchasing strategies.
Supply chain management is often not well positioned when it comes to supply security
It is precisely in times of crisis that a lack of supply security becomes particularly noticeable. The situation often becomes very painful. This applies, for example, if an important supplier fails or if there is a standstill in the supply chain. Short-term alternative procurement is often not possible. And if this is the case, it is usually very costly. Sometimes, the consequences of supply insecurity are extremely critical and may even threaten the existence of the entire company.
In view of the existential importance of supply security, one would assume that Purchasing and the cooperating departments are in the best possible position. And yet this is often not the case. In my mandates, I see time and time again that not even the personnel resources are available for sustainable, proactive purchasing that thinks along with the company, let alone strategic and results-oriented projects for supply security. And if there are modernization projects, such as in the area of digitalization, employees are often already working at above-average capacity with project work in addition to their operational business.
Looking for a manager?
Find one in matchmaker!
and select the appropriate term from our pre-selection.
Secure payment
GDPR-compliant signatures
Insured projects
All documents checked
Stabilizing supply chains: The five most important aspects for better supply security
So the basic recommendation for projects to improve supply security is: create the personnel requirements for a team to professionally take care of your supply chain - and ideally only take care of it for the duration of the project. I would also like to draw your attention to the following five aspects.
In my experience, it is extremely important for companies to focus on supplier dependencies and the associated supply risks as early as possible. This avoids surprises and allows an orderly approach. The following five key issues should be at the forefront of this:
- Recognize and assess single-source risks in the event of supplier failures
- Uncover price dependencies in supplier relationships
- Recognize technical dependencies in long-term supplier relationships
- Identify suitable suppliers through inquiry screening
- Onboarding: Don't buy a pig in a poke
More on these aspects below.
Recognizing and assessing single-source risks in the event of supplier failures
The supply risk associated with single-source supplier relationships is regularly underestimated. The insolvency of an exclusive primary material or component manufacturer can lead to enormous problems, as the supply chain - and therefore the production processes - can be severely disrupted. The company's own delivery deadlines may be delayed and, in the worst case, lead to an earnings crisis due to high penalties. The search for alternative suppliers in such a situation usually proves to be very difficult due to the urgency of the situation.
In order to improve security of supply and at least limit single-source risks to some extent, I recommend:
- Annual audits of suppliers, which give you an early indication of emerging problems at your suppliers - with a peek into the factory halls, so to speak.
- Check (or have checked) suppliers' balance sheets and creditworthiness on a regular basis: This will give you a reliable impression of your partner's economic strength.
- Secure drawings and manufacturing rights: This will save you the complex effort of instructing new suppliers, just in case.
- Identify alternative suppliers: It is always advisable to have a fall-back solution in any supplier relationship. In certain circumstances, it may even be worthwhile to secure capacity through a deposit.
Supply chain optimization: uncover price dependencies in supplier relationships
In my experience, procurement analyses repeatedly show that important items (groups) are only purchased from one supplier over a period of years. The annual negotiations with these suppliers are then often limited to defending against price increases. After all, there are no comparative offers.
I therefore strongly advise you to regularly obtain alternative offers - even if you don't want to break with your supplier. In my experience, the mere presentation of better offers leads to existing suppliers making price concessions of up to 20 percent. Of course, in the context of a partnership between client and supplier, this cannot be repeated every year. You should always keep in mind that reliable and flexible suppliers are a valuable part of any supply chain.
An analysis of all order items for at least the last three years is required for evaluation. In order to be able to tender in a more targeted manner during subsequent sourcing, you should define precise article groups within the product groups and assign their procurement volumes.
Recognize technical dependencies in long-term supplier relationships
Admit it: It is usually very convenient and sometimes just as well-rehearsed to commission (regionally based) companies as sole suppliers for years. You know each other. The quality is okay. The supplier knows what he has to deliver: virtually on demand. This makes work much easier, especially when it comes to drawing parts, which are often quite complex.
At the same time, this approach is not in the interests of security of supply. Why is that? Such well-established supply chains harbor the risk of overlooking technical dependencies in the supplier relationship. For example, I have repeatedly experienced in my mandates that the client did not have detailed drawings of important products, let alone complete documentation.
In this situation, the motivation to benchmark product groups via global new tenders, to qualify, audit and create new suppliers is limited. Purchasing often argues with a lack of resources, quality and supply risks. The design department shies away from the effort involved in "completing" technical drawings. Quality assurance does not consider the increased testing effort in incoming goods to be feasible.
My advice: Don't be put off by these internal arguments (or are they pretexts?). In my experience, many international tenders are very well suited to realizing potential savings of 15 to even 30 percent. At the same time, tenders serve to create a selection of suitable replacement suppliers should the worst come to the worst - all in the interests of improved security of supply.
Strengthening security of supply: Identify good suppliers through inquiry screening
There are usually hundreds of potential suppliers on the relevant tender platforms, some of whom promise more than they are able to deliver. How do you separate the wheat from the chaff here? I have had very good experiences with putting five to ten "representative" drawing parts out to tender at the same time. To keep the effort involved in this sourcing phase to a minimum, the first step is to send out a request matrix with general information on material, processing steps, dimensions and annual requirements, supplemented by a 3D sketch or photo of the selected parts. Based on the feedback and communication with the interested parties, you can narrow down the number of suitable suppliers. You only send the detailed request for quotation (RFQ) in the next step.
The following note may seem superfluous (but in my experience it is not): Please do not send the RFQ until the candidate has signed the non-disclosure agreement (NDA). Then, in addition to the technical data, you can also send CAD-capable drawings, parts lists and the requirements regarding batch sizes.
Don't forget logistics, transportation and customs costs
For a complete comparison of bids from international suppliers, the costs for logistics, transportation and customs are often missing. Despite stating the Incoterms DDP (free domicile) in the RFQ, experience has shown that EXW (ex works) or FOB (free on board) prices are often quoted. Attempts to claim the missing costs from the supplier at this stage of the pre-selection process are rarely successful or involve considerable communication effort. For this reason, I use a first approximation of the freight forwarders' package guide values depending on the country of origin, lot weight and lot volume. Based on these packages for containers or pallets, corresponding optimal batch sizes should be defined in advance in the RFQ depending on the weight and volume of the individual items.
Onboarding new suppliers: don't buy a pig in a poke
Once the open (technical) questions of the selected best-price suppliers have been clarified and the first price negotiations have been conducted, it is important to check the information and promised services to avoid any surprises. Even if these are the familiar steps when onboarding a supplier, I would like to urgently point out the most important measures once again:
- Carry out credit checks: Credit checks are also important in the supplier relationship in order to be able to secure advance payments, semi-finished products or warranty risks at an early stage.
- Analyze balance sheets from recent years: This gives you an impression of the supplier's business development, as well as your own potential share of sales and therefore your importance as a customer.
- Obtain customer references from the supplier: Particularly in the case of international suppliers, proof of well-known, especially German, customer companies provides important information about the reliability of the supplier. It can also be assumed that extensive quality and supply checks have already been carried out at these companies. Their results can reduce the effort involved in your own qualification process.
- Test orders give an initial impression of delivery reliability, quality of the items supplied and reliability in communication with the supplier.
- On-site audits: Especially for new international suppliers, audits are associated with relatively high travel and personnel costs. As an alternative, I recommend commissioning audits by regional service providers based in the supplier country, which are often found as branches of German or international auditing companies.
- Sign risk-oriented supply contracts: This way, you protect yourself and distribute the risk fairly across all shoulders.
Internal optimization or external consulting for supply security
It doesn't matter whether you decide to optimize your supply chains internally or improve supply security through external consulting - provided you have the right skills. The only important thing is that you focus on security of supply as an essential part of your day-to-day business. Every current crisis will certainly not be the last unexpected challenge for the stability of your supply security and the costs in the supply chain.
Are you looking for expertise in supply chain management?
Whether it's a crisis, customs dispute or capricious weather: supply chains are inherently susceptible to disruptive factors. The interim experts at Deutsche Interim AG for supply chain management are ideally equipped to support you quickly and effectively in optimizing supply chains thanks to their numerous project assignments.
About the author:
The interim manager and consultant is an experienced expert in the optimization of processes and supply chains. He has been using digital solutions for many years. The interim manager has been a member of the umbrella organization Deutsches Interim Management e.V. (DDIM) since 2004 - and has also served on the DDIM board in the meantime.
Our consultants
take time for you
Claudia M. Christen
Senior Consultant
Christoph Domhardt
Chief Sales Officer | Authorized signatory
Marlise Stauffer
Managing Director Switzerland
