Logistics and Supply Chain Management, 4th Edition

MANAGING rISk IN THE S U P P LY CHAI N

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Reduction of the supplier base

A further prevailing trend over the last decade or so has been a dramatic reduc-

tion in the number of suppliers from which an organisation typically will procure

materials, components, services, etc. In some cases this has been extended to

‘single sourcing’, whereby one supplier is responsible for the sole supply of an

item. Several well-documented cases exist where major supply chain disruptions

have been caused because of a failure at a single source. Even though there are

many benefits to supplier base reduction it has to be recognised that it brings with

it increased risk.

Sometimes a consolidation of the supply base happens through merger and

acquisition. Since the rate of merger and acquisition has increased so dramatically

over recent years, it follows that the supply base reduction will have accelerated for

this reason alone.

Understanding the supply chain risk profile

Many organisations today are addressing the issues of what has come to be termed

‘business continuity’. In practice, however, there tends to be a limited focus for much

of business continuity management. There is a strong focus on IT and internal proc-

ess management but often the wider supply risk dimension is not considered. This is

The apology came too late for Zhang Shuhong, the Chief Executive of Lida

Plastic Toys Co. Ltd in Guangdong, who committed suicide after laying off over

2,500 employees and halting production. Lida was a major contract manufacturer

for Mattel whose factories were initially thought to have been the source of the lead

paint problem.

The impact on Mattel’s sales was felt most strongly in its biggest market – the

United States – where sales of the iconic Barbie fell by 15 per cent. The total product

recalls cost Mattel about $110 million in 2007;

3

however, the long term impact on

Mattel’s corporate reputation has yet to be quantified.

Whilst clearly there were issues surrounding the design process and quality

control, the case of Mattel highlights the challenges that face any company where

key business processes are outsourced. Whereas in the past the risk to an organi-

sation’s reputation lay mainly within the company, and hence was under its control,

now that risk resides across an extended supply network. In the case of the lead

paint problem it seems that the source of the problem was not even an immediate

supplier but a second tier supplier, i.e. the company that supplied the paint to the

first tier contract manufacturer.

References

1 Financial Times, 16 October 2007.

2 Economist, 29 September 2007.

3 Financial Times, 13 February 2008.