Risk Management: A Challenge and opportunity for the cast of characters in supply chain management…

Natural disasters and global political uncertainty are common place today, many OEMs and electronics manufacturing service (EMS) providers are beefing up their supply chain risk management efforts. Turning to more agile distributors to help them manage supply chain risk.

“Risk management is an opportunity for us,” says, Michael Montenes, President of M.S. Hi-Tech, based in Hauppauge, New York.

Why:
OEMs and CMs need a buffer in the event of natural disasters, like an earthquake, tsunami or political unrest.

Risk Management is becoming a major concern for supply chain managers around the world. With stocking enough inventory to buffer a production plant shutdown not always being an option, agile distributors can shelter customers for a period during high price volatility when natural disasters knock out component production.

From 2003 to 2009 interest in risk management waned because there generally was ample supply and short lead times for parts during that economic climate. But now customers are dealing with risk in the supply chain and what they can do to mitigate or minimize risk. “The good times are over, supply chain risk is ever present in a more globalized marketplace”, says Montenes.

What can OEMs and CMs do:
OEMs and CMs want to understand the country of origin of a part or material so that they can understand how much risk is associated with parts made in a particular geography. Whether the risk is economic or geo- political or environmental.

To reduce or manage risk, OEM and CM customers need information and distributors are often an excellent source for information in the supply chain.

With the Japanese earthquake and tsunami lots of distributor customers were scrambling to verify whether they were going to get the components that they needed. Distributors scrambled to find inventory and looked after their best customers. If nothing else, a lot of time was spent by distributors getting information.

Outside of natural disasters, the biggest risk since 2008 has been economic volatility.

Commodities heat up very quickly, cool off quickly and then heat up quickly again. The industry is not coming back gradually. When demand drops off quickly, inventories typically are scaled back and when business picks up fast, the industry tends to get caught a little flat-footed and there is a boat load of risk.

These quick ups and downs cause a lot of challenges on the supply chain.

While it is challenging, it has been good news for the agile distributor and their core clients.

Many OEMs that were buying 100 percent of their parts from component manufacturers are now shifting a piece of their spending to distribution. OEMs are hedging on both the up and down part of the cycle.

OEMs see the benefit of doing business with distributors. When demand falls, OEMs feel it is good to have a distributor in the mix because the distributor can take back inventory. They can push things out and they won’t hold you to your original delivery commitments. Component manufacturers are also seeing the value.

Another supply chain risk for distributors and their customers is the continuing issue of counterfeit parts.

“We manage that risk by being authorized, franchised and buying directly from manufacturers,” said Michael Montenes, President of M.S. Hi-Tech in Hauppauge, NY.

However, distributors are still at risk because they could receive counterfeit components that have been returned or when entering the independent supply chain.

However, OEMs and CMs must enter the gray/independent market and they still see counterfeit product as a major risk within the industry across all levels of the supply chain. Mitigation and prevention through 3rd Party Testing and Authentication is becoming part of standard pre-production protocol.

Inaccurate forecasts can also result in risk in the supply chain.

OEMs biggest risks are also fluctuating demand or inaccuracies in forecasting practices and new product introductions with uncertain demand, and supplier lead-time fluctuations.

Lead-time padding
Safety stock holding
Product return/rotation/scrap agreements with suppliers can be used to mitigate such risks.

The reality is that risks are increasing because the supply chain is much leaner than in the past. With every company up and down the supply chain trying to minimize working capital, whenever there is a supply chain blip, it tends to be magnified and increasing risk and or the perception of risk. This causes higher levels of insecurity for buyers and procurement specialists.

M.S. Hi-Tech Take:
While in years past supply chains seemed to have normal ebbs and flows, today the marketplace is filled with volatility, uncertainty and increasing risk. In an effort to stabilize your environment reach out to a M.S. Hi-Tech Product Specialist and let us framework a risk mitigation program for your firm…