As millennials begin to replace baby boomers in the electronics workforce, corporate priorities are beginning to shift. Millennials place significant value on their employer’s corporate social responsibility (CSR) stance, for example. As companies try to do good, however, they are also increasing their supply chain risks.
Risk mitigation has become top of mind in the electronics supply chain, but risk extends far beyond an unanticipated shortage. “Supply chain disruptions can happen at any time and as a result of any combination of factors such as geopolitical issues, natural disasters or economic pressures,” according to Wade McDaniel, vice president of supply chain solutions, Avnet Velocity. “A risk-adjusted approach to supply chain management helps ensure that organizations are equipped to mitigate those hazards and continue to effectively meet customer demand.”
Risk-adjusted supply chain management can help an organization identify, quantify, and prioritize the risks inherent — though sometimes hidden — in an organization’s supply chain. A thorough risk analysis, McDaniel said, assesses elements such as the physical location of suppliers’ plants and inventory; the financial stability of partners; and unseen risks such as noncompliance. This type of data can help mitigate supply chain risk and provide a basis for developing best practices for a risk-adjusted supply network.
“There are more things to think about when building – or de-risking — your supply chain than where your ‘stuff’ is,” he said. “Some of your ‘stuff’ could be concentrated in regions that are at high risk of a natural disaster. A partner’s financial stability is important – are they a target for M&A or is there a risk of a line being shut down? And with CSR, it’s the things that you don’t do that put your company at risk for noncompliance.”
Companies in the electronics supply chain have adopted risk management practices to varying degrees. One of the complexities in electronics is the outsourcing of some supply chain responsibilities – specifically, procurement and inventory – to partners such as distributors and EMS providers. “OEMs still have to know what is going on with their ‘stuff, ‘” McDaniel said. “The supply chain is so widely distributed; the question becomes ‘how much risk mitigation do you want to bake into the business?’ Do you want partners to provide safety stock? Do you have multiple partners managing some aspect of your supply? What level of outsourcing are you happy with, and when an event happens, how much planning is going into a response?”
Partners are pretty good about notifying customers how much inventory they have and where it is. But that’s not always sufficient, McDaniel said. “Just knowing something doesn’t necessarily trigger a response.”
In 2011 and 2012 back-to-back weather events shook Japan and Thailand. Distributors scrambled to update their customers on the status of their suppliers—and inventory—in those regions. “Now that you know where your inventory is, you need an action plan,” McDaniel explained. “This type of thing can get very big very fast. If customer inventory needs to go to another location, does that apply to all suppliers or just some—strategic–suppliers? How many suppliers does this customer have? Has that customer invested in safety stock? The effectiveness of a business continuity plan depends on how much of this planning you do in advance.”
Businesses also need to be cognizant of where their major vendors are sourcing from. Many sources of raw materials –or in the case of semiconductors, silicon wafers—are concentrated in one geography or among a few, big suppliers. “Many companies have plans for business continuity, but they don’t dig deep into their supply base,” McDaniel said. Wafer fabs, for example, are concentrated in earthquake-prone Taiwan. “The question then becomes ‘what can I do about my suppliers’ location? Very few companies are going to say they don’t like where their fabs are located. Running two parallel manufacturing line in separate regions isn’t efficient for most suppliers. A risk assessment may acknowledge a supplier’s location is a problem but very few companies are in a position to do anything about it,” McDaniel said.
Second sourcing, of course, is how most companies hedge their bets against falling short of supply. But in the electronics industry, merger and acquisition is whittling down the number of suppliers for many key components. In many cases the companies that are acquired are financially vulnerable. Understanding your suppliers’ financial health is also a risk mitigation strategy.
There is plenty of public information available for a financial risk assessment, according to McDaniel. Standard & Poor’s, Moody’s or Dun & Bradstreet provide in-depth financial information and credit ratings for both public and private companies. Businesses can also benchmark their partners using commonly available financial information. Financial strength, management effectiveness and efficiency are key performance indicators (KPIs) that can be benchmarked. Sales, general and administrative (SG&A) models reflect a company’s efficiency while an analysis of working capital indicates liquidity and funds that are available for a company to grow its business.
McDaniel also points to a pool of processes and methodologies that, if not followed, can expose a company to risk. “Millennials, who are now joining the workforce, want to know who their brands are doing business with,” Mc Daniel explained. Companies have come under attack from activist groups and investors. One example McDaniel uses is a Greenpeace action against multinational food and beverage company Nestle.
Greenpeace attacked Nestle on social media for using palm oil in its products. The palm oil was from sourced from areas in the world that were being deforested and endangering orangutans. The electronics industry equivalent to this dilemma could be conflict minerals. U.S. legislation requires publicly traded companies to disclose whether or not they source materials from certain conflicted regions in Africa. “CSR is even more far-reaching than conflict minerals and at some point someone will go off the reservation unintentionally and the consequences will become clear,” McDaniel said. Businesses may not consider policies and practices – the lack thereof – as part of their risk management strategy or not have an action plan once a risk is identified.
As a global distributor Avnet provides its customers with supply chain solutions that anticipate such factors. As an authorized distributor Avnet has visibility into its suppliers’ network. “Our customers want to know who our suppliers are, and who their suppliers are,” McDaniel said. Oftentimes, organizations fail to understand the potential vulnerabilities that can compromise the supply chain’s ability to handle the unexpected. “If we are not being responsible for the way our company behaves in a variety of ways it can expose a company to risk,” he added. “A risk-adjusted approach to supply chain management helps ensure that organizations are equipped to mitigate those hazards and continue to effectively meet customer demand.”