Suppliers Are a Weak Link – for Now

Weak links in the supply chain change from time to time, but they never really go away. The global recession hit all segments of the tech industry hard, and supplier insolvency remains a leading concern in the electronics supply chain.

“While high-tech manufacturers have been significantly affected by the global recession, their suppliers have been hit even harder — particularly smaller suppliers that may not have the resources to weather a protracted downturn,” writes Simon Ellis, IDC Practice Director, Supply Chain Strategies, in a report conducted by IDC Manufacturing Insights for UPS. “Consequently, supplier insolvency has been a problem, especially where that insolvency interrupts supply of high volume or proprietary components.”

Supplier fallout was a major concern in 2009 and at the beginning of 2010, when there appeared to be no end in sight to the recession. Recent events, such as financial instability in parts of the EU, uncertainty over China's currency moves, and unrest in North and South Korea are all valid reasons for ongoing unease.

During the worst part of the recession, companies began conducting a higher level of financial due diligence when qualifying suppliers and even customers. Distributors frequently extend credit to their customers, and new customers in particular received a high level of scrutiny. Companies should continue to closely investigate their partners' financial viability, Ellis says. “Financial metrics should be included in [suppliers'] service level agreement so that early warning signals can be captured.”

Purchasing organizations should always have guidelines in place for second and third sourcing options, particularly for high-volume commodity products. A certain level of redundancy is not necessarily a bad thing. “Ensure that you have some level of acceptable redundant supply or know where to quickly go for capacity in an emergency,” recommends Ellis. “Certainly, this adds some up-front cost, so a risk assessment is useful in determining where to act.”

The IDC/UPS survey also identified other areas where tech companies can improve. (Supplier instability was actually a close second in the list of concerns.) In order:

  1. End-to-end visibility emerged as the No. 1 weak link, as cited by 48 percent of companies.
  2. Unstable suppliers and demand planning tied for second place, with 44 percent of companies naming each as a weak link area of their supply chains.
  3. Managing inventory came in fourth, with 38 percent of companies calling this a weak link for their supply chains.
  4. Flexibility for handling non-standard requests and orders was named by 33 percent of companies.

These are all familiar, and each has topped the list at some point in time. I was a little surprised to see supplier insolvency ranked so high, because most companies on shaky ground were closed or acquired during 2009. But there are good reasons to remain concerned, and practices adopted during the worst part of the recession shouldn't be relaxed. There will always be a weak link somewhere.

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