Risk Management: Get a Better Grip on Sub-Tier 1 Suppliers

Globalization has radically changed supply chain practices in a number of ways, but the transformation has added even more risks to an already very long list of what can go wrong. Among the potential problems stemming from globalization are more supply chain disruptions among lower-tier suppliers, according to Munich-based analyst firm Riskmethods

Suppliers are now often dispersed around the world in different time zones and continents. This makes assessing and monitoring suppliers and then putting out fires in the supply chain when they happen that much more difficult.

Source: Riskmethods

Source: Riskmethods

The process might typically involve identifying and monitoring more logistic hubs such as airports and ports; potential choke points, such as the Suez Canal and Kiel Canal; and inventory in warehouses and distribution centers that can be in remote locations anywhere in the world, Heiko Schwarz, CEO of the Munich-based analyst firm Riskmethods, told EBN.

 “Business partners are often located in emerging markets, where changes in political, macro-economic as well as infrastructural risks are extremely difficult to monitor,” Schwarz said. “Dense and highly focused supplier portfolios have resulted in a continually increasing risk position in the event of a disruption within these supply networks.”

Quantifying the risk

Meanwhile, sub-tier 1 suppliers remain the weakest link. According to a Riskmethods report, suppliers further downstream than tier 1 providers are the source of over half of all supply chain disruptions. Among those surveyed in the study, 51% of disruptions originated from tier 2 and lower suppliers, which represented an increase of 9% compared to 2013. Overall, the percent of supply chain disruption incidents increased to 81 % in 2014, compared to the average of 78.6% since 2010.

But as they respond to these heightened risks, electronics buyers quickly realize the difficulties inherent in more closely monitoring  their supplier base to mitigate the risks, especially among their sub-tier 1 supplier base.

“Unfortunately, 75% of most companies have no transparency in the sub-structures of their supply chains. An obvious reason is the high degree of manual effort required to identify the current situation and the current changes in the second-tier and lower supply chains, and to incorporate these into risk monitoring,” Schwarz said. “The effort in a company – even where this process is well supported by electronic voluntary supplier information – is estimated at approximately 30 minutes per year.”

The protocol

According to Schwarz, properly assessing and monitoring sub-tier 1 suppliers involves the following tasks:

  • Dispatching or activating the questionnaire (e. g. via voluntary supplier information);
  • Following up on unanswered questionnaires;
  • Following up on incomplete or incorrect answers;
  • Transferring the answers (sub-tier supplier master data, logistics hubs, data on recovery timeframes, etc.) into the risk monitoring process;
  • Requesting individual risk data sources (credit ratings, geo-risk profiles, CSR information, sanctions tests, country risks, etc.).

Too much to handle

Second-tier and lower supplier assessment and identification is thus a time-consuming and costly process, when done manually compared to managing -tier-1 suppliers, said Schwarz.

Evaluating sub-tier 1 suppliers involves a very stringent and consistent methodology. Rigorously and consistently assessing sub-tier 1 suppliers is also not something that often overstretched procurement professionals or other professionals often have time to do properly. As sub-tier 1 suppliers introduce more risk to the supply chain as outlined above, there are just so many hours in the day that procurement and logistics professionals can devote to finding, correcting, or replacing the weak links in the supply chain.

Let the software do it

A viable solution is to invest in risk assessment software, which can pay a handsome ROI instead of relying on manual assessments, said Schwarz. 

According to Riskmethods, for example, manually monitoring five sub-suppliers and 100 tier 1 suppliers requires 300 working hours per year. The time involved is typical for a company when buyers or logistics experts assess suppliers themselves. They typically command $50 per hour in wages, so the cost of this task usually totals $15,000 annually. However, software-based supply chain identification software can shave 58% from those costs, generating $8,700 in annually savings. Additionally, the time saved by using software means that buyers have more time to devote to procurement and logistics management, said Schwarz.

All of these reasons add up to why it makes sense to rely on software solutions for supplier monitoring and management as well as procurement, says Schwarz.

“With fully automated software, companies can devote more time to more valuable tasks, instead spending money on human resources that software can handle instead more efficiently and for less money,” says Schwarz.

Related posts:

0 comments on “Risk Management: Get a Better Grip on Sub-Tier 1 Suppliers

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.