Global supply chains face a variety of macroeconomic and microeconomic risks. In particular, sourcing risk management is becoming increasingly important not only because of increased global sourcing, but also due to a higher frequency of supply chain disruptions caused by natural and man-made disasters, disease outbreaks, political upheavals, piracy, and acts of terrorism. Efficient and effective sourcing risk management is important to improve financial outcomes, gain competitive advantage, and ensure business continuity.
We analyzed supply chain audit reports of ten leading global companies operating in the retail, cosmetics, aircraft manufacturing, and third-party logistics industries. We found that managers with sourcing responsibilities, not surprisingly, face a variety of challenges such as political stability, quality uncertainties, currency fluctuations, increased inventory, faster product obsolescence, rising wage rates in developing economies, security issues, port congestions, longer lead times, supply chain disruptions, and fluctuating fuel and transportation costs. However, when it comes to making actual sourcing decisions, the major consideration is lowest cost supplier combined with transportation costs. Other aspects, such as inventory and lead times, do not command as much attention. We delved a little deeper and found three main reasons why sourcing managers, though aware of the importance of factoring in supply chain risks, do not explicitly incorporate the cost of those risks in their decisions. These factors are:
1. Focus of top management only on low cost
2. Lack of visibility
3. Lack of training
Focus of top management on lowest per-unit cost as the main driver of most sourcing decisions results in bonuses targeted to cost reductions and transaction-oriented supplier relationships. Partly, this is a result of senior management having limited or no knowledge or training in logistics and supply chain management. Lack of visibility and/or lack of access to relevant information create difficulty in making holistic decisions. Sometimes, the limited visibility is a deliberate attempt to restrict information, resulting from low trust between colleagues and a “protecting the turf” orientation. And, at times, it is to retain bargaining power over other supply chain partners. Procurement is a complex profession requiring general managerial skills, procurement expertise, and continuous training; and a Lack of training leads to suboptimal decisions.
To counter these factors companies can do two things. First and foremost is providing training on incorporating service and price considerations in bidding processes; integrating lead time, quality, and cost risks in total landed cost analyses; and setting up comprehensive performance metrics for supplier relationship management. The second is encouraging internal and external integration by developing supplier relationships based on trust and long-term commitments; investing in information technology to facilitate timely transfer, availability, and transparency of information; and setting up cross-department team-based metrics to encourage cooperation between employees.
This article is part of the monthly series authored by ISM’s Logistics & Transportation Group Board Members, who are current practitioners, consultants, and educators. In future columns, they will continue sharing their views on a number of Supply Chain topics. Dr. Ila Manuj is an assistant professor of Logistics and Supply Chain Management at the University of North Texas and can be reached at Ila.manuj@unt.edu. Dr. J. Paul Dittmann is the Director of the Office of Corporate Partnership at the University of Tennessee and can be reached at jdittman@utk.edu. Dr. Ted Farris is a Professor of Logistics and Supply Chain Management at the University of North Texas and can be reached at Ted.Farris@unt.edu. He is also a member of the Board of ISM’s Logistics & Transportation Group. Membership in the Group is open to all ISM members who are responsible for or have an interest in the Logistics & Transportation fields.
We analyzed supply chain audit reports of ten leading global companies operating in the retail, cosmetics, aircraft manufacturing, and third-party logistics industries. We found that managers with sourcing responsibilities, not surprisingly, face a variety of challenges such as political stability, quality uncertainties, currency fluctuations, increased inventory, faster product obsolescence, rising wage rates in developing economies, security issues, port congestions, longer lead times, supply chain disruptions, and fluctuating fuel and transportation costs. However, when it comes to making actual sourcing decisions, the major consideration is lowest cost supplier combined with transportation costs. Other aspects, such as inventory and lead times, do not command as much attention. We delved a little deeper and found three main reasons why sourcing managers, though aware of the importance of factoring in supply chain risks, do not explicitly incorporate the cost of those risks in their decisions. These factors are:
1. Focus of top management only on low cost
2. Lack of visibility
3. Lack of training
Focus of top management on lowest per-unit cost as the main driver of most sourcing decisions results in bonuses targeted to cost reductions and transaction-oriented supplier relationships. Partly, this is a result of senior management having limited or no knowledge or training in logistics and supply chain management. Lack of visibility and/or lack of access to relevant information create difficulty in making holistic decisions. Sometimes, the limited visibility is a deliberate attempt to restrict information, resulting from low trust between colleagues and a “protecting the turf” orientation. And, at times, it is to retain bargaining power over other supply chain partners. Procurement is a complex profession requiring general managerial skills, procurement expertise, and continuous training; and a Lack of training leads to suboptimal decisions.
To counter these factors companies can do two things. First and foremost is providing training on incorporating service and price considerations in bidding processes; integrating lead time, quality, and cost risks in total landed cost analyses; and setting up comprehensive performance metrics for supplier relationship management. The second is encouraging internal and external integration by developing supplier relationships based on trust and long-term commitments; investing in information technology to facilitate timely transfer, availability, and transparency of information; and setting up cross-department team-based metrics to encourage cooperation between employees.
This article is part of the monthly series authored by ISM’s Logistics & Transportation Group Board Members, who are current practitioners, consultants, and educators. In future columns, they will continue sharing their views on a number of Supply Chain topics. Dr. Ila Manuj is an assistant professor of Logistics and Supply Chain Management at the University of North Texas and can be reached at Ila.manuj@unt.edu. Dr. J. Paul Dittmann is the Director of the Office of Corporate Partnership at the University of Tennessee and can be reached at jdittman@utk.edu. Dr. Ted Farris is a Professor of Logistics and Supply Chain Management at the University of North Texas and can be reached at Ted.Farris@unt.edu. He is also a member of the Board of ISM’s Logistics & Transportation Group. Membership in the Group is open to all ISM members who are responsible for or have an interest in the Logistics & Transportation fields.
