The concept of sole sourcing is as old as that of strategic sourcing. Call it vendor consolidation, volume concentration, or reduction of part-number proliferation, the endgame is always the same: reduce the number of vendors at the part and enterprise levels, to help drive cost efficiencies.
The idea, of course, is a good one, and has enabled original equipment manufacturers (OEMs) and Tier 1 vendors to meet aggressive cost targets and keep the price of new vehicles low. But what happens when unexpected events occur in today’s interwoven global supply chains, and disrupt supply from that one “consolidated vendor”?
Time and again, both OEM and Tier 1 suppliers have been rattled by events such as the West Coast longshoreman strike, Japanese tsunami and nuclear plant disaster, and trade wars. But time and again, the pressure to drive relentless cost reductions have prevented them from making a meaningful effort at diversifying the supply base.
COVID-19 is once again bringing this issue to the forefront, and U.S. OEM and Tier 1 vendors should take another look at this issue to mitigate the enormous supply risks that disrupt production, exact huge costs for automotive companies, and erode shareholder wealth.
So what can the automotive industry do to reduce supply-chain risk from a vendor-proliferation perspective?
First and foremost, the emergence of a new mindset that emphasizes some amount of profit sacrifice in exchange for supply security by way of dual vendors is important to consider as part of the overall procurement strategy. This mindset needs to begin in the corner office, and be executed in the buyer’s office.
An equally pertinent sub-strategy concerns the commitment to develop new suppliers within North America. This might not be easy, since many vendors have long migrated to Asia, leaving behind smaller companies that lack scale to support production volumes, let alone the whip-smart efficiency that the automotive industry demands. Nevertheless, a renewed focus on greater domestic or hemispheric sourcing is among the recipes for reducing risk that need to be given greater emphasis during the strategic planning process.
A third and equally important aspect is that companies must expedite the development of a formal and regimented supply-chain risk management (SCRM) framework that is overseen at the highest levels to insure accountability and objectivity. It must address multiple aspects of supply-chain risk, including political, regulatory, environmental, health, ethical and social concerns. For purposes of this discussion, however, it should be able to detect any risk from excessive sole sourcing, through its integration with enterprise resource planning (ERP) and e-procurement systems.
Many of the technologies that the SCRM will leverage are nascent and emerging. Others, such as marketplace and procurement platforms, are quite mature and are expanding the use of applications for planning, supplier-relationship management and global trade management. Technologies for visibility, simulation and optimization help to support a risk-management framework that can identify existing vendors for new opportunities, discover the potential for curbing part-number proliferation, and provide advance warning about emerging risks.
Imagine how much pain could have been averted if a louder warning had awakened all of us in January about the perils that awaited us in the spring.
It’s time to rethink supplier consolidation. Automotive companies must recognize that profits and supply-chain risk go hand in hand, and that diversifying the supply base is one of the keys to insuring business continuity for all interests in the supply-chain ecosystem.
Rakesh Sharma is a procurement engagement director for Tata Consultancy Services (TCS) Global Supply Chain Practice.
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