Inside Supply Management Magazine

Heeding Early Supplier Warning Signs Can Help Avoid Disruption

May 18, 2020

By William Crane, CPSM

During rapid contractions in the economy, as with the Great Recession and the current downturn, decisive actions are required to avoid costly plant down time. Historically, these daily tough calls have been made with limited information under significant pressure.

As the U.S. economy eyes a restart of its economic engine in the second quarter; the global supply base will do so under substantial duress. In a present sea of pessimism, there is a beacon of hope to better days ahead; the key is successfully navigating through the challenges.

Economists at New York-based investment bank Goldman Sachs forecast U.S. gross domestic product (GDP) will shrink by as much as 34 percent in the second quarter, followed by 19-percent rebound in the third quarter. These projections indicate that the U.S. economy is poised for the steepest economic contraction since World War II, followed by the fastest recovery on record.

The anticipated swift recovery in the third quarter will create a demand shock wave. Like a stone dropped into a still pond, this ripple will quickly move throughout the supply chain. Rapid contractions and expansions cause supply chains to break. The somber near-term reality is that many suppliers will miss deliveries and cut staff. Some will file for bankruptcy.

Thus, organizations need to proactively act now to avoid costly supply disruptions. The strategies you deploy along with the pace of your actions will determine how your organization will fare during the recession and eventual recovery.

Thriving in a Dynamic Environment

Automotive suppliers that outperformed, both financially and operationally, during and after the Great Recession did so thanks in part to earlier supplier intelligence information. Suppliers that not only survived that recession but benefited during the contraction — for example, by receiving resourced business — did so because they took proactive actions to mitigate and, in some cases, prevent disruptions. The last recession and subsequent major supply shifts, for example, pertaining to the U.S.-China tariffs, have provided insightful lessons on how to manage crises. Leaders avoid disruptions by obtaining better real-time information and proactively acting to mitigate supplier risk.

In the days ahead, it’s important to recognize early supplier warning signs and take actions to avoid supply disruption.

1) People challenges. Supplier people challenges can come in various forms, including slow responses, reshuffled positions and negative attitudes. However, the sudden miscommunication with a supplier that was a top performer before the downturn is an early red flag.

Actions: Supplier bandwidth issues are one of the quickest ways to experience supply disruption. Head off issues by providing suppliers a short list of preferred firms that can solve people-bandwidth challenges. Staffing firms often work best for tactical support needs, although they can prove difficult to use in a recovery environment with volatile employment markets. Advisory firms typically provide superior short-term strategic support for complex issue remediation at higher costs. Technology-enabled managed services firms offer a blend of long-term support at a lower cost.

2) Delivery issues. Another of the first red flags of a supplier in duress is delivery issues, which can come in a variety of forms, including missed program milestones, delayed part shipments and failed quality inspections.

Actions: During changing market conditions, it is important to more closely monitor and document day-to-day changes in supplier performance to quickly identify new patterns. Further, use a simple five-whys (5Y) or more detailed eight-disciplines (8D) tool to determine the root cause of small inconveniences before they have time to germinate into larger problems.

3) Financial deterioration. Now more than ever, it is critical to request and more frequently monitor strategic supplier financials. Steep contractions and rapid increases in supplier sales strain cash flows, working capital and bank loans.

Actions: Software that allows you to request updated financials from suppliers and automatically calculates key financial metrics can prove invaluable tool, as such information for many private suppliers is limited. Understand key supplier financial metrics like the Z score bankruptcy-predictor model and available credit lines to gain a better supplier health report.

“Factoring can be a helpful tool for suppliers to access capital by using invoices as collateral while often being less restrictive than traditional bank loans or other outside lines of credit,” says Dan Anderson, vice president and general manager at Kansas City, Missouri-based MHC Financial Services.

4) Subsupplier disruption. Often, it is not your Tier-1 supplier that causes disruption but a Tier-2 or Tier-3 supplier. For automotive systems such as front-end assemblies, every part from headlamps to bumpers to fasteners is needed for a saleable assembly to ship. Subtier supplier disruptions will eventually find their way to your door.

Actions: To gain valuable visibility into your extended supply base, request to map your Tier-1 and Tier-2 suppliers. To ensure the best results, approach this request as a true collaborative partner and seek actions suppliers can take to improve their companies.

“Automated plan-for-every-part software-as-a-service (SaaS) tools enable your suppliers to efficiently self-report key part data like lead times, inventories and tooling. This approach significantly reduces the time and cost to acquire data on your extended supply base,” says Sime Curkovic, supply chain risk management expert and professor of integrated supply management at the Haworth College of Business at Western Michigan University in Kalamazoo, Michigan.

Build Stronger Partnerships

The need for closely partnership with your suppliers is never greater than during times of uncertainty. Remind yourself that companies are comprised of people, not equipment, software or parts. As people, we react to stresses differently, so empathizing with a supplier should always be your starting point.

However, it is important to remain pleasantly persistent in your pursuit of information to mitigate your company’s supply risk. Your goal should always be to seek all possible solutions with suppliers to remediate difficulties. Resourcing should be a last resort.

To best serve stakeholders, you need real-time supplier intelligence information to make better decisions faster. Proactively monitoring early supplier warning signs and taking preemptive action can help you avoid supply disruption.

William Crane, CPSM, is founder and CEO of IndustryStar, an Ann Arbor, Michigan-based on-demand services and software technology company that partners with leaders to reduce the cost, time and risk of bringing new products to market.