Ever since Yossi Sheffi published The Resilient Enterprise in 2007, the supply chain community has paid much more attention to the issue of risks. All of us know that there are lots of things that can go wrong in any supply chain. The Supply Chain Risk Leadership Council even tried to capture these risks in a list that I affectionately call the “Seven Pages of Plagues”. (If you’re ready to have nightmares about the range of calamities that might ravage your supply chain at any moment, spend some time reading Appendix 2.1 in this report…)
Most of the plagues (supply chain risks) on this list are totally beyond the control of supply chain managers. There’s just not much we can do to prevent earthquakes, floods, or worldwide economic crises. But there is one segment of these risks from which almost all of our companies could generate significant positive returns with a series of small, but smart, investments: supplier performance risk.
Supply risk is defined as the probability of an incident associated with inbound supply from individual supplier failures or the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety. (from “A Grounded Definition of Supply Risk” by George Zsidisin)
The Hidden Costs of Supplier Performance Failures
Supplier performance failures are a huge part of our daily routines. Anything that could go wrong with an inbound order seems to happen at the worst possible time. But even though they are common, the cost of supplier performance failures can be difficult to quantify, and are often taken for granted as a cost of doing business. Michael Smith and Lee Buddress provided a great overview of the costs of supplier failures during the 2007 ISM Conference. They broke them down into two categories: timing failures and quality failures. And both of them have the potential to do a lot of damage to the entire supply chain.
Let’s look first at the timing failures. If a supplier ships late, you may end up paying more for expedited transportation. You might also end up carrying more safety stock inventory to compensate for that supplier’s unreliable performance. If the supplier can’t deliver an order before you run out of inventory, then you might need to purchase the same materials from another supplier at a higher price. And if there are no alternatives available, a late supplier delivery could cause a stockout or a line down for your facility.
When a supplier ships early, on the other hand, that creates costs, too. Early shipments lead to early invoices and payments, and this can create cash flow complications for your firm. Early shipments also translate into extra inventory, which eats into your working capital. Since most of our buildings these days are designed to facilitate “flow” and a high number of inventory turns, early shipments can physically clog facilities and hurt the performance metrics. Yuck!