Strategic Purchasing

Reducing risk takes top priority

Reducing supply-base risk has always been an important part of strategic purchasing, but it seems like it has increased in importance in recent years.

It may be because of the Japanese earthquake and tsunami in March 2011 that, in additional to killing more than 22,500 people and washing away many homes and businesses, also halted production of many crucial electronic components and other materials. Many buyers had to scramble to find alternate sources and parts.

The Japanese catastrophe was followed in October 2011 by flooding in Thailand that shut down many disk drive and component production facilities.

But it’s not just natural disasters that strategic purchasers need to worry about. The ongoing debt crisis in Europe, the sluggish U.S. economy, the budget sequester, nuclear weapons development in North Korea and social responsibility labor issues in China are all risks that have the potential to disrupt the electronics supply chain. And of course there are risks involved in doing business with specific suppliers. For instance, a supplier may be in financial trouble or may not be investing enough in research and development or production capacity to support all its OEM (original equipment manufacturing) and EMS (electronics manufacturing services) customers.

As a result, many more electronic OEMs and EMS providers are devoting more resources and spending more effort to identify potential risks in their supply chains. Strategic buyers are entrusted with “de-risking” their supply base by identifying risks and developing strategies to avoid, reduce or eliminate them.

Strategies can vary depending on the type of risk. For instance, the Japanese tsunami and Thailand flood were examples of “Black Swan” events—rare but devastating incidents that are highly disruptive to a supply chain. But other ongoing risks such as the political situation in North Korea, the debt crisis and labor issues in China require continuous monitoring.

Strategic buyers say there is no one-size-fits-all to reduce risk. However, many buyers say inventory can play a part in supply risk management. Of course, most companies frown upon having extra inventory, which is why some manufacturers have long-term relationships with distributors.

Carrying inventory is part of distributor’s business model, and many OEMs and EMS providers take advantage of consigned or bonded inventory programs that distributors offer. Such programs help companies manage supply chain risk. In addition, the distributors are reliable sources for parts after a disaster because of the inventory that they hold.

Even large multinational electronics OEMs, which typically buy direct from component manufacturers, will purchase parts from both authorized and independent distributors when there is a shortage of parts caused by a disaster or just because of an unforecasted surge in demand.

If fact, Ron Clarke, vice president of worldwide procurement sourcing, IBM Integrated Supply Chain, says the only time IBM purchases parts from distributors is when there are shortages. He noted that Big Blue increased its buys from distributors after the Japanese earthquake.

Buyers say one simple way to reduce risk is to keep the number of sole-sourced parts on bills of materials to a minimum. However, it is also important to make sure that suppliers manufacture parts in different regions of the world. For instance, it didn't do a computer company any good if all of its disk drive suppliers only had production in the floodplain in Thailand when the flooding hit in 2011.

Multiple locations for manufacturing are also essential for custom parts such as application-specific integrated circuits. A supplier of the chip should be able to manufacture the custom circuit in different regions in case disaster strikes one locale.

Because of the prevalence of outsourcing in electronics, communication among OEMs, EMS providers and distributors is essential to reduce risk, according to many buyers. When a disaster strikes, accurate information is imperative in order to deal with the crisis and make informed decisions about alternate parts and suppliers.

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