221
12
Emerging Risk Management Tools,
Techniques, and Approaches
is chapter presents a variety of emerging tools, techniques, and
approaches to address and manage supply chain risk. ey appear here
because they are not fully developed or implemented at most rms. e
approaches we present include becoming a preferred customer, creating
supply chain heat maps, mapping the supply chain, declustering clusters,
creating a exible supply chain, creating a risk war room, and managing
operational working capital. Other emerging approaches, including total
cost measurement, estimating available supplier capacity, and calculating
risk scores, appear elsewhere in the book.
BECOME A PREFERRED CUSTOMER
Supply chain leaders understand that the link between positive relation-
ships with suppliers and improved corporate performance is a strength-
ening rather than weakening one. Companies that fail to develop positive
relationships may nd their suppliers allocating limited capacity to other
rms, sharing their most innovative ideas with other customers, or exiting
an industry segment altogether, all of which will lead to increased risk. As
our research clearly shows, becoming the preferred customer to suppli-
ers oers advantages that are not as readily available to other customers,
advantages that could lead to future competitive advantage and reduced
risk.
1
As one executive summed up clearly during a research interview,
“Becoming a preferred customer is going to be one of the best ways we
have to manage supply chain risk in the future.”
222 • Supply Chain Risk Management: An Emerging Discipline
A research project involving hundreds of suppliers revealed a clear link
between a customer’s (i.e., the buyer) behavior, the satisfaction level a sup-
plier has with a customer, and a supplier’s willingness to provide preferen-
tial treatment that less- satised suppliers are not willing to provide. e
following summarizes three important ndings from that research.
Supplier satisfaction relates directly to a customer’s performance and
behavior rather than demographic or other attributes.
Supplier satisfaction correlates signicantly with factors that relate to a
customer’s behavior toward the supplier (i.e., pay on time, share relevant
information, treat suppliers ethically, etc.) rather than demographic or
other factors such as supplier size or the size of a contract. Interestingly,
a slight negative correlation exists between the total years a supplier has
worked with the customer and lower satisfaction with that customer,
which presents clear risk implications.
No statistical relationship exists between the size of a supplier in terms of
sales and supplier satisfaction with the buying customer. Furthermore, no
relationship exists between the size of the contract relative to the supplier’s
total sales and supplier satisfaction with the buying customer. Supplier
satisfaction relates directly to customer performance and behavior rather
than the volume of sales that the customer represents. is is welcome
news because it suggests customers can change their behavior to improve
supplier satisfaction, thereby leading to preferred customer benets.
e relationship between supplier satisfaction and viewing a customer
as preferred is extremely strong.
e correlation between supplier satisfaction and viewing a customer as
preferred is unusually strong. is strong indicator reveals a clear link
between satisfaction and preferred customer status. An important conclu-
sion is that becoming a preferred customer will likely not occur if a sup-
plier is dissatised with a buying customer.
Satised suppliers are more willing to provide valuable kinds of pref-
erential treatment to their preferred customers compared with less-
satised suppliers.
A clear statistical relationship exists between supplier satisfaction with
a customer and the willingness of that supplier to provide certain (and
valuable) kinds of preferential treatment. What is surprising is that in
Emerging Risk Management Tools, Techniques, and Approaches • 223
many cases the preferential treatment that satised suppliers are most
willing to provide to their preferred customers are the kinds of treatment
that suppliers overall are least willing to provide. Preferred customer sta-
tus brings with it preferential treatment that is not available to a typical
customer, benets that can contribute to a hard- to- duplicate competi-
tive advantage and reduced supply chain risk. Figure12.1 identies the
supplier- provided outcomes that suppliers may potentially provide to
their most- preferred customers.
Gaining Preferred Customer Status
We know that gaining preferred customer status can bring with it some
hard- to- duplicate advantages that have clear risk management benets.
e question becomes how a buying company can become a preferred cus-
tomer to suppliers. e following provides some guidance about how to
achieve preferred customer status.
Understand How Suppliers Perceive Your Company as a Customer.
How can a buying company improve its relationships and receive pref-
erential treatment from suppliers if it does not know in what areas it is
doing well and where it is falling short? Gaining this insight requires a
•
Capacity dedicated to the
customer
•
Personnel to work directly at the
customer’s facilities
•
Engineers to support the
customer’s product design needs
•
Investment in new equipment
that benets only the customer
•
Exclusive use of new technology
developed by the supplier
•
Hold inventory to support the
customer’s needs
•
Provide direct nancial support
if needed
•
Create information technology
systems unique to business with
the customer
• Product innovation
• Production process
innovation
• Process and supply chain
innovation other than
production processes
• Shorter quoted lead times
• Preferential scheduling of orders
• Early insight into the supplier’s
future product technology plans
• More favorable payment terms
• Performance improvement ideas
• More frequent deliveries
•
Access to the supplier’s executive
level personnel
• Access to supply market
information the supplier
may possess
• Better pricing
• First allocation of output if
supplier capacity is constrained
•
Early warning to potential supply
problems
Supplier-Provided
Direct Investment
Supplier-Provided
Innovation
Supplier-Provided
Favorable Treatment
FIGURE 12.1
Supplier- provided preferential treatment.
224 • Supply Chain Risk Management: An Emerging Discipline
commitment from the highest levels of the supply organization to solicit
supplier- provided feedback. Companies oen use third parties to collect
information from suppliers to ensure the integrity of the process.
Pursue Trust- Based Relationships with Suppliers. Few would ques-
tion the importance of trust within a buyer– seller relationship. Industrial
customers can demonstrate their trustworthiness through open com-
munication with suppliers, following through on promises and commit-
ments, sharing relevant supply chain information, and acting legally and
ethically in all business dealings. e importance of ethics and protecting
proprietary information within a trust- based relationship is also critical.
One outcome from a customer’s relationship eorts should be the pur-
suit of activities that promote frequent contact, particularly since com-
munication frequency and the level of trust within a relationship are
highly correlated.
Recognize the Importance of Knowledgeable Personnel and a Stable
Workforce. Our research with suppliers reveals that more than 90% of
suppliers agree it is “very important” that the personnel they deal with at
their customer are knowledgeable. Maintaining supply knowledge will be
a challenge, for example, as the baby boomer generation exits the work-
force. is exodus will require a set of talent management strategies that
focus on acquiring and then retaining personnel with the right set of capa-
bilities, including knowledge about how to manage supply chain relation-
ships and risk.
Avoid the Seven- Year Itch. Various research studies have concluded that
the satisfaction that suppliers have with their industrial customer tends to
decline the longer the supplier has worked with that customer. e inec-
tion point for this downward shi oen occurs around the seven- year
point of the relationship. e challenge becomes one of recognizing that
this downward shi is a real possibility and then developing an action
plan to ensure this shi does not occur. If a downward shi has occurred,
the challenge becomes one of reenergizing the buyer- seller relationship.
Request Preferential Treatment. We know that satised suppliers are
willing to provide preferential treatment to their most favored customers.
e task becomes one of understanding how to obtain that treatment. One
time to address this subject is during contract negotiations, particularly
when craing a supplier’s statement of work. Another time is during
annual supplier review meetings, meetings that suppliers recognize as
extremely valuable. Suppliers also indicate a strong willingness to engage
in various forms of executive- to- executive interaction and participate in
Emerging Risk Management Tools, Techniques, and Approaches • 225
buyer– supplier councils that feature executive- level engagement between
the customer and key suppliers.
Tap into Supplier Innovation. A variety of ways exist to tap into sup-
plier innovation. ese include early supplier involvement during prod-
uct and technology development, technology demonstration days where
suppliers are encouraged to showcase their new ideas, and supplier par-
ticipation on customer improvement teams. If innovation is the lifeblood
of growth, then it becomes a competitive necessity to tap into sources of
innovation wherever they exist.
Never discount the important relationship between being a preferred
customer to suppliers and reduced supply chain risk exposure. e sta-
tistical linkages between supplier satisfaction, preferred customer status,
and preferential treatment are unambiguous.
CONSTRUCT SUPPLY CHAIN HEAT MAPS
As the concept of supply chain risk management (SCRM) began to solid-
ify into a body of knowledge and then courseware, several major beliefs
evolved into a set of questions- of- discovery regarding the maturity of the
supply chain. As these tenets began to solidify, a mechanism to review,
evaluate, and position a company’s maturity in supply chain excellence
and design took shape in terms of a spider diagram. is diagram proles
a company’s supply chain maturity, which then relates to the risk associated
with that maturity. is has evolved into a supply chain risk awareness
heat map. e heat map involves a set of about 100 questions- of- discovery
across 10 areas in an end- to- end supply chain. e answers provide a
glimpse into a company’s exposure to supply chain risk. e spider dia-
gram provides a relative prole of red (high), yellow (medium), and green
(low) levels of risk.
Heat map users can download a cloud- based tool and answer a set of
self- assessment questions. e resulting heat map provides, potentially for
the rst time ever, a view into a company’s risk across its entire supply
chain. Some of the areas evaluated within the map include leader ship, bal-
ance scorecards, information technology, sales and operations planning
(S&OP) processes, supply chain techniques, supply base, and logistics. e
heat map is an awareness technique that starts a dialogue about supply
chain risk. Part of its value is that many companies do not maintain an
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