The finger-pointing over who is to blame for the tragic sinking of the BP oil rig in the Gulf of Mexico offers a stark and timely reminder of the high cost that companies can pay when supplier relationships fail.

Even as the oil giant tries to stem the leakages of crude that are blackening its reputation, it continues to blame its primary supplier, Transocean, for the mess. BP leased the ill-fated rig from Transocean, and points to the failure of vital safety equipment that could have prevented the accident.

No doubt more information will emerge about Transocean's role in the disaster, but it is clear that there is a serious misalignment between the oil rig operator and its customer, BP.

Although such disasters are, thankfully, rare, breakdowns between trading partners that cause high collateral damage are not. For example, just prior to the gulf disaster aircraft manufacturer Boeing announced that it was suspending shipments of sub-assemblies for its troubled 787 Dreamliner passenger jet owing to parts shortages suffered by suppliers of the units. This is the latest in a saga that began in September 2007 with the introduction of a decentralized manufacturing model that uses suppliers across the globe to help design and make major parts such as wings and fuselages for assembly in the U.S. The results thus far have been disappointing. The Dreamliner production line has been plagued by problems, and a root cause seems to be a misalignment between Boeing and its global supply network.

How can companies avoid such problems, particularly in an environment where short-term cost and performance pressures can force them into making flawed outsourcing decisions that cost them millions of dollars, and to repeat these errors?

1.       Supply chains run deeper and longer than ever, and limiting your attention to first-tier suppliers is no longer adequate. For example, companies in the healthcare equipment domain closely monitor the performance of their second-tier suppliers as they worry about the regulatory aspects of their business that might not be managed properly by primary suppliers. In BP's case, to what extent did it monitor the extended supply chain that supported drilling operations in the gulf?

2.       Evaluating suppliers exclusively on the basis of price is a high-risk strategy. Many companies that fell into this trap have reverted back to the practice of judging the price and the value of the products and services that suppliers deliver. These enlightened organizations have realized that you need to understand suppliers' business principles, values and capabilities as well as its price points.  The extent to which BP evaluates its suppliers on these metrics is a question worth asking in light of the disaster in the gulf.

3.       Segment and manage suppliers according to the criticality of the sourced item. The criterion used to determine criticality will depend on the unique profile of the company and this is likely to change over time due to changes in the macro environment, market shifts, design modifications, technological advances, etc. But more importantly, a thorough understanding of your own business objectives and priorities is required to know your key supply chain needs. With these needs in mind it might make sense to retain one strategic supplier for one set of items, and multiple suppliers in arms-length relationships for other items.  This is a strategic activity that will have a huge impact on the competitiveness of the company. Clearly Transocean is a critical supplier to BP, but does the oil giant segment its supply base in such a way that it can devote the appropriate resources to strategic vendors like these?

There are many lessons we can learn from BP's predicament. For businesses, the disaster provides a salutary reminder of the importance of robust supplier relationships.

Dr. Singh can be contacted at msingh@mit.edu.

Source:  MIT Center for Transportation & Logistics