When reporting their Q4 2022 results, Ford executives pointed to a component shortage that cut output by some 100,000 units. What’s true for cars and trucks is also true for any product using electronic components: if just one is missing, even a low-value item, the assembly can’t ship, and that means revenue lost.
Avoiding, or at least lessening the impact of component shortages requires manufacturers to review their supply chain risk management practices. This starts by determining and ranking exposures and risks, involves identifying appropriate methods of risk mitigation, then developing and implementing appropriate risk management strategies.
Know and Prioritize Risks
- Interruption to the supply of components (as has happened with automakers) is likely the biggest present concern, but many things could cause this. A short list includes weather disruptions, industrial disputes, and of course, a ship getting stuck in the Suez canal.
- Sudden shifts in customer demand can be another risk for the products being assembled. The issue here is with long supply chains where components may arrive for products customers no longer want. Alternatively, an inability to supply increased quantities at short notice will lead to shortages that result in lost business with a demand that is left untapped.
- Counterfeit products being inserted into the supply chain is another risk. These are likely to be substandard and fail prematurely—if they work at all—resulting in warranty claims and even liability issues. Effective supply chain risk management includes protecting against such eventualities and the best independent distributors have the tools and expertise to help.
- Poor quality is a closely related risk. The problem here is that if components are found not to perform as required, the time needed to obtain replacements will likely impact build and delivery schedules.
One approach to identifying and prioritizing risks is to brainstorm and then apply risk probability numbers to the events listed. (Similar to performing a process FMEA in manufacturing.) Alternatively, or perhaps in conjunction with this approach, consider developing a heat map to show which components are at the greatest risk of supply chain problems.
Supply Chain Management Risk Mitigation Methods
California State University, Fullerton, identifies five approaches to managing risk:
- Avoidance: Taking a course of action that eliminates the risk. For example, sourcing domestically-produced components eliminates supply chain risks due to shipping or other problems.
- Retention: In the context of supply chain risk management, this is about recognizing a risk that exists and choosing to manage rather than eliminate it.
- Sharing: Rather than rely on a single source, look to diversify and develop multiple sources. (With electronic components the cost of verifying quality and performance characteristics can make this impractical.)
- Transferring: One way of transferring risk is by insurance, where an insurer pays out if an event happens. This may have limited applicability in supply chain management: while financial recompense may be helpful a shortage of components still leaves customers disappointed.
- Loss prevention and reduction: Taking actions to reduce the impact of supply chain disruptions. Holding large safety stocks is one example, although this increases costs while most businesses are looking for cost savings throughout their supply chains.
Supply Chain Risk Management Strategies
In determining risk management practices, every business should review their particular situation and develop a customized approach that meets their needs. This will almost certainly incorporate aspects of these six supply chain risk management strategies:
- Risk analysis
- QA and inspection
- An agile supply chain
- Safety stocks
- Supplier due diligence
Develop a structured approach to identifying and reviewing supply chain risks. This should be repeated periodically, at a frequency to suit the magnitude and impact of the individual risks. In addition to the heat map mentioned previously, focus on components with the biggest potential impact on production – typically those used across multiple assemblies.
Explore the cost of insuring deliveries, or the potential for having this insurance borne by the suppliers. While this won’t placate customers unhappy about late delivery it will reduce the financial impact on your business.
QA and Inspection
Implement systems for monitoring supplier performance so changes in trends or behaviors are identified quickly. Define appropriate inspections to ensure components are of consistent quality, and to guard against counterfeit or otherwise substandard products being introduced upstream in the supply chain.
An Agile Supply Chain
The long lead times associated with overseas supply are always a risk. (Electronic components can ship by air but the additional costs are significant.) Look for suppliers closer to home and with the ability to switch production between individual part numbers at short notice. Ideally, they should also be able to ramp up or scale back production quickly too.
Possibly the least favorite strategy is to increase holdings of components where risk analysis indicates the greatest vulnerability. Besides the financial impact, this also exposes the business to the risk of obsolescence if product designs or market tastes change. However, this risk can be transferred to the supplier if they are willing to hold the inventory at their cost.
Supplier Due Diligence
When evaluating potential sources for electronic components, consider their vulnerability to supply chain disruptions. For example, some countries may be at greater risk of economic or political upheaval and/or sanctions. Ideally, your suppliers should be willing to work with you on supply chain risk mitigation, holding safety stocks, carrying insurance, implementing appropriate QA systems, and working to become more agile. Look for versatile suppliers who will help.
Partner With Proven, Trusted Vendors
As the chip shortage problems at Ford show, problems with the supply of low-value components can have an outsize impact on delivery, and hence business performance. Guarding against this requires integrating supply chain risk management practices into every aspect of procurement, QA, design, development, and production.
The six strategies discussed here will provide businesses with the tools needed to identify risks and safeguard operations. Working with a responsive and understanding hybrid distributor is an important way to use them.