The Nexus of Supply Problems, Part One

Pet owners reeled from the news from the American Food and Drug Administration. Dog and cat food from major brand-name distributors, sold in retailers across the country, contained the industrial chemical melamine that proved deadly to some the pets. A major recall ensued in 2007. The American wholesalers, packagers and retailers said they had no idea — the problem came further down their supply chain. Press interviews found that the practice of cutting costs via melamine came from areas where Western businessmen rarely ventured, if ever.

36533212_xxlDog food is a far cry from, say, manufacturing cars or electronic components. But it highlights a commonality that all supply chains share — they’re only as good as their weakest link, including second, third, even fourth tier suppliers.

We think we know suppliers, those who provide direct product and services to our core business — General Mills, for example, supplies cereal to Target, who sells breakfast to consumers. But someone has to supply wheat and sugar to General Mills. Someone has to sow, fertilize, harvest and transport what will eventually end up in the package, and then the bowl.

It’s easy to forget about the importance of these second-tier suppliers — out of sight, out of mind. But it’s not just food ingredients. General Mills’ janitors, Purina’s secretaries, the people who service Target’s air-conditioning, are all suppliers that offer potential risks.

They form an entire new class of supply chain components, suggests a paper published last year in the Journal of Supply Chain Management. The researchers dub these components “nexus suppliers.” They may not seem like big parts of the chain. They may be smaller players whose importance isn’t immediately obvious. But they occupy critical junctures that can make or break a product or chain.

“Typically, a supplier is designated as a strategic supplier based on the criticality of the products and technologies it provides,” the study notes. “… Literature suggests firms select their strategic partners based on internal attributes of partners, such as marketing knowledge capabilities, intangible assets, complementary capabilities, or interpartner fitness.”

But firms that consider where and how a supplier fits into their chain often fare better, the professors say. That fit can prove just as crucial as sourcing the right firm via traditional marketing and networking routes. It’s not just about good leadership, a solid reputation and the right price-points, but also making sure that those suppliers mesh with everything else your firm needs — and understanding the implications and fallout should they fail.

If one of these suppliers is disrupted — if the air-conditioner repairman doesn’t show, if the sugar shipment gets lost at sea, if the floor manager in China adds dangerous chemicals into a mix that the trade negotiator flying back from the U.S. doesn’t realize — it’s still the end business, the Target, the General Mills and Purina, that suffer.

The key lies with data — analyzing potential weak points, and resolving them before they rise to disastrous levels.

“In an era when extended, complex supply chains pose unprecedented risks and opportunities, big buying companies cannot afford to be in the dark about suppliers far down their supply chains,” three of the study authors wrote in the Harvard Business Review. “Thanks to advances in knowledge about network modeling, databases, and analytics, they don’t have to be.”

In our next post, we’ll discussed what’s at stake when key nexus suppliers fail, and how it’s not just things but also data and your firm’s reputation. In a third post, we’ll discuss how to mitigate problems you do find.

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