I like to learn how supply chains evolve and how those changes affect complexity. One example is that as the number of suppliers continues to grow, it becomes more challenging to manage them—especially those that may be located in other countries.
At this time of year, some of you may be wondering—or might even be anxious—about just what, exactly, those college students are doing all day, because what they do and how they act is largely beyond your control. Those same concerns apply to some suppliers.
Considering how numerous and far-flung various suppliers may be, it can be difficult to really know how they operate. The impact of discovering that not all suppliers follow processes correctly—whether, for instance, it’s that they use lead in paint that’s on promotional drinking glasses or that they spray chemicals on the wooden pallets used to transport cartons of over-the-counter pain relievers—can be quite costly. There are other risks as well.
According to a recent article I read in the WallStreetJournal, the very nature of increasingly complex supply chains makes it difficult to guard against suppliers acting in their own interest. Such opportunism often leads suppliers to take advantage of poorly written agreements, or to simply break those agreements outright if the risk or cost of getting caught is low. And the deeper they are in the process—that is, the further from the end customer they are—the less responsibility they are likely to show in the absence of effective controls.
On his TV show AC360, Anderson Cooper has a segment I like called Keeping Them Honest, and I’m reminded of that when I think about some suppliers. Companies need to investigate the details of their supply systems to understand the risks, and then work to prevent problems—in other words, keep their suppliers honest.
The article I read offers several ways to help check supply chains not just for integrity, but also for on-going stability. Those points are:
1. Constantly monitor potential risks in the market. While it’s impossible to eliminate opportunism, manufacturers can be vigilant about monitoring suppliers and how they meet their obligations. Sometimes managers let their devotion to efficiency prevent them from taking steps to avoid problems, even when new risks are apparent.
2. Make suppliers and intermediaries responsible and accountable. The most common weakness in a supply chain is what is referred to as moral hazard. For example, if a supply chain has intermediaries whose compensation is based solely on the volume of orders passing through, there is little incentive for them to root out opportunism beneath them in the chain.
3. Change the ways you test and measure. There are many ways for suppliers to cheat the system. Some may substitute ingredients, fool tests and sanitize a plant just before inspection. Some opportunistic suppliers will even test a company’s limits to find the minimum acceptable standard.
4. Understand and accept the role of regulation. Regulation adds to costs and runs counter to the goal of ever-increasing efficiency. But if the costs mitigate or dramatically reduce the risks of failure, then regulation is the most efficient way to curb opportunism and decrease costs in the long run.
I don’t want to imply that all suppliers are opportunistic and act solely in their own best interest. In fact, I’d like to believe that is rare. But the risk is there nonetheless, and I think we’ve all heard stories about opportunistic suppliers, so it’s certainly a valid concern.
Let me know what you think. Are you keeping them honest? If so, how do you do it?