It goes without saying that lean and efficient but highly complex supply chain networks can be fragile, and few components in such a network can be more sensitive than the supplier. Disruption or failure in other links can be troublesome, even expensive, but workarounds often can be found. However, stoppage in supply of vital parts or materials can have disastrous consequences for a company.
Supplier management, perhaps once seen as something that company executives might get around to considering, is now seen by many as imperative to survival. Supply-line breakdown is all the more likely in today's financially strapped world when suppliers are more challenged than ever.
The Dresser-Rand Group, one of the largest suppliers of rotating equipment solutions to the worldwide oil, gas, petrochemical, and process industries, could well be in the vanguard of companies implementing supplier-management solutions.
Dresser-Rand's client list includes BP, Chevron, ExxonMobil, General Electric, Fluor, Jacobs Engineering, Rolls-Royce and Solar. Thousands of suppliers worldwide across multiple industries help it serve those customers. An estimated 10 percent of of those suppliers are deemed absolutely critical to the manufacturer's operations. With $2.2bn in revenue in 2008, the company knows it has to stay on top of its supply lines or risk losing staggering sums.
No two projects are alike, says Dresser-Rand's Caldwell Hart, but huge financial loss is a common denominator if parts and products aren't available. "Some of our customers can lose millions of dollars and hour when equipment goes down." Clearly, suppliers who can't perform in such instances are a liability.
Among the challenges Dresser-Rand faces are providing engineered-to-order parts, addressing low-volume orders, monitoring spot-pricing fluctuation, managing limited sources of supply, and assisting customers in navigating the global market. A multi-tier risk-management system was created in part around implementation of the DNBi solution from D&B Supply Management Solutions.
DNBi monitors Dresser-Rand's global supply base; manages communications and financials of critical suppliers, including scheduling phone calls, visits, reports, and audits; and provides lead-time for action when necessary, including facilitating change of source, lean events, or implementing payment terms and/or on-site management.
DNBi is powered in part by data from parent company Dun & Bradstreet, which helps mitigate credit and supplier risk, increase cash flow and improve profitability, according to Jim Lawton, vice president and general manager of D&B Supply Management Solutions. Identifying, qualifying, registering, auditing and monitoring suppliers is completely automated by DNBi.
The partnership began in early 2006, says Hart. The manufacturer wanted a proactive system, something that would help it identify and act on potentially damaging situations before any harm resulted. The DNBi solution gives Dresser-Rand the visibility it needs into tier one of its supplier base (about 10 percent of its base) through the use of alerts.
Those red flags go up when a supplier is deemed to have moved outside a predetermined range of risk indicators. Obvious indicators of potential trouble include financial health of a supplier, lawsuits or liens involving suppliers, OSHA incidents or EPA violations. Other signs are much more subtle: management changes, late deliveries or increasing lags in responsiveness to inquiries.
Lawton says the alerts are merely an element of a much larger risk management system. Moreover, the exceptions must be viewed in context and evaluated on a supplier-by-supplier basis. "You must have a robust review process of critical suppliers even if you don't receive alerts on them," Hart says. It's simply wise to stay proactive.
Clearly, it's up to Dresser-Rand to determine how important a given supplier is to overall operations and what, if any, action to take. However, when the solution was implemented, Dresser-Rand drew up a list identifying the most important supply partnerships and contingency plans. Red flags on any one of the listed partners is likely to send risk-management team members into action.
In addition, it's important for one's suppliers to have their own risk-management plans in force. And you can't assume that such plans exist. A company should insist on seeing the emergency plan, and on frequent updates, Lawton says.
Two indicators, SSI and SER ratings, help diagnose the financial health of a supplier. The first gauges instability, allowing a user to see if a partner is likely to cease business and leave creditors in the lurch, or is likely to reorganize or seek relief from creditors under state/federal law within the next 90 days. SER, or supplier evaluation risk, predicts the likelihood that a company will seek legal relief from its creditors or cease operations within the next 12 months.
A scenario that developed almost a year ago illustrates how important predictive ratings are, and what action one might take.
After it was alerted that one of its vitally important casting suppliers was having problems, Dresser-Rand made inquiries. Suspicions were not allayed by verbal assurances that everything was fine with the company. On-site inspection of the supplier's plant revealed that despite what its officers had told Dresser-Rand partners, it planned to suspend operations for two months. Clearly, that was unacceptable, and the business was taken elsewhere.
Undoubtedly, the greatest return on investment that a company can receive from its supplier-risk management solution is the avoidance of a major incident and the costs and labor associated with it. However, calculating the value of managing supplier risk is not an easy task. Unless a company has experienced a major incident in its supply chain, it may not understand the necessity of having a risk management solution in place. But when a contract is worth millions of dollars, leaving everything to chance should not be acceptable to management. Visibility into suppliers is dividend enough.
D&B Supply Management Solutions, www.dnb.com
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