Are you at a risk of your supplier’s dwindling financial position?
There is a two-fold stress on the buyer in manufacturing unit- one is the pressure to reduce cost on raw material and bought-outs and the other is an emerging risk of suppliers closing shop and disrupting supplies. What should be the right approach of the buyer to minimize this risk?
In order to minimize the risk in the supply chain, the manufacturer should take up these steps:
Keep a track of supplier’s financial position: This can be done by monitoring metrics like – days of receivables, days of inventory stock, debt-equity ratio movement, capital adequacy ratio etc. If there is an increasing trend on the first three metrics or a declining trend in the fourth, this should make you alert.
Know your supplier’s supply chain: Get a track of the tiers of suppliers in the supply chain. This is difficult because most suppliers would like to keep sway over their own suppliers, taking any external control as undue interference. Also suppliers of most proprietary components would not reveal their detailed supply chain. Nonetheless, this is an effective way of knowing about the supplier’s position.
Keep options for other suppliers open: This is one of those solutions easily suggested than implemented. But there are major constraints. The gestation time taken for the new supplier to develop a component is between 6~18 months depending on the complexity; but to make the supplier develop the close intuitive relation with the manufacturer would take years. Also certain technology constraints would also prevent any profitable exit strategy from the supplier.
Take a stand with other manufacturers as a group: A stand-alone policy would not provide beneficial results. The manufacturers should identify other like-minded manufacturers who are willing to come forward, leaving behind their competitive silos, to forge partnership in supplier development and procurement. This grouping would drastically reduce costs and help postpone customization in the supply chain. There is also an added advantage for the manufacturers, of a strong bargaining power to keep costs low at the supplier end. In many manufacturing industries like automotive, where the bought-outs account for 65~70% of the Cost of Goods sold, a 20~30% reduction in cost would directly lead to a 15~20% improvement in operating margin at low investment levels.
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