How To Manage Risk in a Global Supply Chain
supply chain may not be quite as dynamic or complex as capital markets, but when it comes to managing supply chain risk the challenge is, arguably, can be as formidable as managing risk for instruments such as mortgage-backed securities or credit default swaps. Perhaps that is because of all the moving parts that there are in a supply chain, which we define as a network of companies that cooperate to convert ideas into goods or services for their customers.
In an ideal world, the interests of these companies are aligned. They adapt to structural shifts in the market, such as currency fluctuations or other economic shifts, and are agile enough to respond quickly to changing supply and demand. But without this ‘Triple-A’ approach[i], risks can become significant and multiply, especially in a global environment. In this article, we highlight those risks and suggest what companies operating in a global environment can do to manage them. (Note: The facts and circumstances of the scenario we below are true; however, the names of the company and key personnel are not).
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The following scenario is an example of what can go wrong in a global supply chain if sufficient attention is not paid to managing risk.
Kai Chen was walking back to his office to prepare for his daily conference call with his French executives in Paris and customer representatives in the United States. The weight of the program he was responsible for was definitely having an impact on him, but he maintained his erect posture and calm expression. However, the call would prove to be unsatisfactory and people would be upset, though Kai had difficulty understanding why. After all, his people had made great strides since the program was sourced to them one year ago.
Kai was the Operations Manager for Nanjing Automotive, a Tier One auto parts supplier of power train components in Nanjing, China. The company, a Greenfield operation, had been started 2 years earlier by a large global automotive parts company in France, part of that company’s strategy to develop a significant supply position in China, just as the auto parts market was experiencing significant growth. Since that time, Nanjing’s business had grown substantially, both from local contracts with Chinese automotive customers, and customers in North America and Europe. That was the good news. The challenges they faced, however, were numerous, including unclear technical specifications, resource shortages, and unreasonable, demanding customers.
The contract causing the most grief for people at the facility was one for a new control module for an electronic 6-speed transmission, technology that had been proven on high-end, low-volume vehicles, and that was now being introduced in lower-cost, mass market cars. The control module’s performance had exceeded expectations in the market, and demand for Nanjing’s components was far higher than originally anticipated. Kai pushed up his glasses and looked over the daily production numbers once more before dialling the telephone.
Meanwhile, near Paris, Bernard Moreau, Vice President of Procurement and Supply, looked up as two managers entered his office for the daily conference call with their facility in China and their customer in Detroit. It was 11 a.m. in Paris. Timing for the call was OK for Bernard and his team, but the sun was going down in China and just coming up in the United States.
The company’s Korean facility seemed to be doing fine with a similar product for Hyundai. Kai’s project in China, however, had grown out of control very quickly since the operation had started work on it one year ago. Its American customer, normally very demanding, had been struggling financially for several years, and was directing its Tier One suppliers to do whatever it took to drive down costs, including establishing supply sources in emerging markets around the world. Its new operation in Nanjing had seemed like a good candidate for the power train control module project, and though the production ramp up was faster than initially planned, the operation was still having issues with quality.
Bernard had two people on the ground in Nanjing, but they had been in Asia too long, forced to extend their international assignment by 3 years to support the Greenfield[1] project in China, after the successful launch of a new plant in Korea. The two expats were tired and struggling to make a difference. It seemed that the plant had difficulty understanding the expectations and never had enough people to hit the required numbers.
Global sourcing
Organizations look global for a number of reasons, as noted in Figure 1. While cost savings may be the first thing that comes to mind, say for a firm considering sourcing product in China, those savings can prove to be more elusive than leadership imagined when they started the exercise. Numerous challenges exist: increasing wages in ‘developing’ markets, logistics costs increasing with the price of oil, frequent travel required between locations in different continents, translation services, licenses, fees, legal costs and the likes. Something else must be driving the offshoring exercise than cost savings alone, as in most cases, the savings are much smaller (or non-existent) through the life of the project than we anticipate. Whether we want to access new technology, new markets, or develop relationships that may lead to sales in that country, firms need to look beyond the labour cost savings.
Figure 1 – Reasons to Outsource
What can go wrong in a global supply chain
One of the largest under-appreciated factors associated with dealing with offshore suppliers is the element of risk. Car companies have become adept at managing suppliers within their traditional supply chains. While there are exceptions, they source capable, healthy suppliers, develop capabilities in those suppliers, and work together to bring quality parts to vehicle assembly in a reliable fashion. When issues arise, the OEM (original equipment manufacturer) has robust (and often invasive, radical) ideas for getting production back on-line.
This is well enough in a domestic environment. The moment we establish a supplier outside our typical environment, however, risk goes up by orders of magnitude and often that risk isn’t understood. One of the key risk factors is a cultural ‘gap’ between the two firms. In this case, that gap between the customer in North America, the supplier’s production facility in China, and the supplier’s executive leadership in France has resulted in a supply crisis characterized by delayed builds, issues of quality, daily global conference calls and third-party resources being called in to “help.” Stress and anxiety are severe, especially for shop-floor middle managers responsible for production in China, managers who can’t appreciate how it got so bad, so quickly. Leadership on all three continents was sensitive to cultural differences but lacked the collective capability to get the necessary performance out of a global, cross-cultural team that was operating from different levels within their respective organizations’ hierarchy.
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