We're preparing to sit down with a new potential client and the management of the factory which we've sourced for their project tomorrow afternoon.  Every time we work on a sourcing project, we're faced with the question of how close do we bring the vendors to the customers.  Many outsourcing service providers fear they'll be left out in the cold in a situation like this.  But we've found it to be very helpful, in fact, necessary to always allow our customers the opportunity to meet the manufacturer that will be producing their products.  The value to us in keeping everyone arms length from each other is smaller than one might think (the value essentially being mitigating the risk of being cut out of the process prematurely), and it costs us, and raises risk levels, in several ways.

• Honesty and straight-dealing: It may be impossible to quantify the value, but bringing everyone into the communication loop may be one of the most important aspects of all parties knowing each other.  It sets a tone.  Communication and information can flow more freely.  Less time and energy is spent on Prisoner's Dilemma thinking–trying to figure out how to come out ahead of the other guy in all situations, and more time is spent collaborating to figure out how to resolve problems and innovate. 

I recently had an interesting conversation with a former senior exec of sourcing and manufacturing at Nike and Disney about transparency in their supply chains and working with vendors to improve their labor and environmental practices.  At a time when these companies faced serious risk in consumer backlash because of the exposure of poor working conditions at factories, Nike, for example, took a hard look at their manufacturing base and changed course to focus on working more intimately with fewer suppliers.  According to this gentleman, everyone opened their books, saw what each other was making, understood that everyone needed to make money for the system to work, and collaborated on resolving issues that challenged any party in the supply chain, because they could all be honest about the causes and effects of what was taking place.  Nike is now known to be well out in front of the 8 ball when it comes to dealing with corporate social responsibility issues in its supply chain.  Issues do and will continue to come up for them, but they are in a much better place to resolve these problems at factories.  The same cannot be said for many other companies out there. 

• Understanding the manufacturing process: When sourcing a new manufacturer for a product, particularly when a new product is being developed, it's always helpful when a client has toured the manufacturing facility where the product is going to be made.  Understanding the engineering of the production plan, seeing the machines that are used, how materials are stored, how quality control is accomplished, all offer a client the opportunity to better understand why certain issues are coming up and what can be done to resolve them.  This is particularly helpful in the product design and new product development process, when the ability of a manufacturer to include certain product features, use specific materials, or provide these things at a specific cost, is challenged by what is actually feasible in the manufacturing and sourcing process.  An understanding of the manufacturing process and capabilities allows all parties involved to quickly move beyond trying to understand why something is an issue, to resolving the issue. 

• Knowing the key players: In any organization, you will find that there are some people that really move things forward, and some that don't.  Whether this is because they wield formal authority or soft power in the organization, they get up and get to work earlier than the next guy, or they aren't afraid to pick up the phone and talk to people, you want to know who are the people that really drive progress and solutions for your project in the organization.  When the S hits the fan–you want to be able to reach these people.

Not all customers have the opportunity to travel to the factory location, particularly if it's overseas.  It's our job to be the feet on the street, whether in China, Vietnam, Mexico, the Midwest, or southern California.  But, we encourage customers to come see the manufacturing plant and meet key players in the contract manufacturing organization if they have the opportunity and motivation.  Organizations relying on keeping people, and parties in the process, at arms length when designing or developing new products, sourcing new manufacturers, and managing the supply chain as a whole, do so because they lack the ability to provide strong value in other capacities.  There are many ways to add value to the sourcing process.  This is one simple way to make a big impact.

As the phrase goes, "when the tide goes out, you find out who has been swimming naked" many businesses are painfully finding out whether their offshore manufacturing sources are without bathing suits.  Some companies have turned much greater attention to the managing of their costs and risks in the supply chain in recent years, and a few have found competitive advantage in doing so.  Now, it's becoming a necessary means of survival. 

Panjiva, a company which data mines US Customs data along with other sources to develop insight into manufacturing and trade trends, notes in this blog post that "From January 2009 to February 2009, in just a single month, the number
of global manufacturers shipping to the U.S. dropped 10%, from ~131K to
~118K."  Furthermore, Panjiva reports that:

• Along similar lines, the percentage of significant global manufacturers on Panjiva’s Watch List has grown to 29%.
• The percentage of significant U.S. buyers doing business with Watch List manufacturers now stands at 40%.

Many SMEs do not have the resources to build risk models to assess risk in the supply base and to create and implement expensive risk management plans.  However, even without sophisticated quantitative methods, the principles can be applied.  Thinking through various events that can occur, the likelihood of these events, and the impact they can have, can be a useful exercise for an SME to undertake.  In good times, many won't delve too deeply into creating contingency plans.  Of course, in challenging times, it's the companies that did set this up who eat the market share of those who are too busy scrambling to save the company.

Given the economic environment, a few risk infused events that are more likely to occur on the supply side might be price increases, MOQ increases, or quality fade–stemming out of a situation in which a supplier, or even a 2nd tier supplier, is hitting the skids business-wise and needs to find a way to get more cash with the customers and orders they still have.  They may be looking at monthly survival. 

A lower probability event that may have a high impact may be your supplier going under and completely disappearing.  Worst case scenario: they disappear with your money.  Or, perhaps they don't respond to your emails and phone calls next time you are ready to place an order.  This won't give you much time to source another supplier, develop their manufacturing processes to meet your specifications, and pick up where the last one left off.

How can we create a decisive advantage in managing these risk factors?  Create greater visibility in your supply chain and expand your portfolio of options.  Visibility is  information–thus extract more information from your suppliers and about your suppliers.  The easiest way greater transparency can be had is with a more open, trusting dialogue.  These kinds of things are much easier to do face-to-face, particularly in countries like China.  But use third party information to help create a comprehensive picture.  Consider having factory and company financial audits performed.  Information from local banks used by your suppliers, government agencies, and other sources can give you an idea of the financial status of your factory.  Another useful source is the company Panjiva, mentioned above.  Panjiva offers reports on the importation data for thousands of suppliers that allow one to learn about fluctuations in a suppliers shipments to the U.S., their other product lines, and other customers.  In this case, knowledge is power and with it, you obtain a much better view into your suppliers current situation and their impetus for trying to renegotiate terms. 

Also, are you single sourced on key products and components?  Source second and third suppliers for your products.  Alternative sourcing options gives you leverage with knowledge of general pricing and terms available in the market, as well allows you a stronger negotiating position by not feeling entirely dependent on one supplier.  

Summer's around the corner…if you don't already have a bathing suit, now is the time to start shopping.