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Realistic Supply Chain Transparency

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Realistic Supply Chain Transparency

 

Supply chain risk mitigation cannot now be achieved without transparency through Tier 2 overall and Tiers 3 to 5 on both core competency components and essential manufacturing commodities.

 

Critical, core competency components and essential manufacturing commodities must be identified more deeply as either criminal interdiction, M&A buyout or natural calamity can put a critical supplier offline.

 

The Golden Rule: Know Who makes What Where How at Tier.

 

Realistic chain transparency

 

ICG implemented this level of supply chain analysis in 2011 as its standard for chain transparency and risk mitigation after evaluating eight event series:

 

(1) 2004-to-date Mexican Drug Trafficking Organization (DTO) incursions against companies and personnel in Mexico.

 

(2) 2004-to-date Global Intellectual Property (IP) harvesting by Chinese, Russian and other state-related assets.

 

(3) 2011 Japanese earthquake/tsunami. Multiple tier impacts.

 

(4) 2010 Chrysler US east coast supplier flooding.

 

(5) 2011 Thailand OEM/multiple tier flooding.

 

(6) Impact to a segment by the entry of an Apple-like firm with similar mastery, manipulation and price suppression of key industries.

 

(7) Corruption risks, notably BRIC and emerging markets.

 

(8) Lanthanide (rare earth elements) monopoly and hostile export restriction by China.

 

Consequence convergence

 

Supply chain risk mitigation cannot now be achieved without transparency through Tier 2 overall and Tiers 3 to 5 on both core competency components and essential manufacturing commodities. (The ultimate buyer is the Original Equipment Manufacturer (OEM) or Tier 0.)

 

Critical, core competency components and essential manufacturing commodities must be identified more deeply as either criminal interdiction, M&A buyout or natural calamity can put a critical supplier offline.

 

ICG sees consequence convergence between (1) criminal supply chain predations, (2) natural disaster impacts (e.g., earthquake, tsunami and flood), (3) repositioning and localization shifts in global supply chains, (4) supply embargos with political intent and (5) commercial supply chain risks.

 

Highly critical, core competency components and essential manufacturing commodities must be identified more deeply as either Drug Trafficking Organization (DTO) interdiction, M&A buyout or natural calamity can put a critical supplier offline, perhaps permanently. The Chinese are examining US and EU supply chains for such pickoffs.

 

OEM/top tier manufacturers err in thinking that they have acceptable transparency with Tier 1 identification. That is a false positive as Tier 1 is often (even very often) as much assembler as manufacturer. Many strategic components or processes are at the Tier 2 to Tier 5. Any and all are subject to penetration or interruption.

 

In terms of compliance response, ICG has seen entities affect supply chain realignments to move potential trouble points below the mandated Tier 1 review level, e.g., to Tier 2 and below. Risk remains for the incautious upper tier or Tier 0.

 

Today the ultimate buyer, the OEM (Original Equipment Manufacturer) or Tier 0, knows relatively little of their supply chains below their Tier 1 suppliers (those suppliers selling directly to the Tier 0.)

 

That superficial view is grossly insufficient. Without greater transparency, Top tier firms cannot protect themselves and their customers from strategic surprise and disruption.

 

The ICG supply chain Golden Rule: Know Who makes What Where, How at Tier.

 

In the aftermath of the Asian tsunami/earthquake, Toyota realized that it was vulnerable not knowing who made what where at tier. The firm publicly stated that it would gain that chain transparency. Two sources subsequently confirmed to ICG that Toyota had achieved its goal. We must suspect that Nissan is not far behind.

 

Tier 2 is a minimum. Witness the single Tier 2 bearing manufacturing that halted both Toyota and Nissan engine production. ‘Where’ is not enough; you need what will likely happen at ‘where’ and what happens along the transit path (which can be as simple as the 4X price rise of limes in Mexico due to criminal cartel regional road taxes).

 

The shift to local sourcing over Low cost country (LCC) sourcing will bring a surge of new OEM/Tier 1 orders to a supply base that can potentially overwhelm and consume existing suppliers’ current capacity, leaving upper tiers scrambling in a state of strategic surprise.

 

All an industry needs for disruption is for an entity to decide to become its sector Apple, a DTO understands the effortless blackmail and extortion at hand for the taking, the unanticipated impacts of a global sourcing realignment, or the next earth sciences calamity.

 

More than one disruption can occur simultaneously. There are frequent Ladder Effects where one failure compromising or weakening an adjacent process or entity.

 

Specific concerns

 

If Mexican Drug Trafficking Organizations (DTOs) fully engage the US/EU Tier 0/Tier 1 automotive industry in Mexico in the manner which they have penetrated the Mexican automotive and mining industries, there will be a spike in corporate and personal extortion and kidnapping, as well as penetration and takeover of entire supply chains just a Mexico is poised to expand its manufacturing footprint under a Backshoring renaissance.

 

Backshoring has the potential to create supply chain capacity chokepoints as appropriate productions are repatriated.

 

CONUS (Continental US) and Mexican suppliers will benefit whereas Canadian suppliers will see negative impacts.

 

Backshoring’s manufacturing repatriation may begin to reduce one of the most massive involuntary Intellectual Property (IP) transfers caused by Tier 0/OEM firms driving suppliers to move design and manufacturing to the PRC.

 

OEMs and Tier 0 assembly plants surrender 100% of their IP in a joint venture regardless of the actual partner shares.

 

The scope of IP theft often escapes attention as it is outside the normal purchasing mindshare, yet its impacts are severe in both Direct and Indirect supply chains.


[Originally released to clients November, 2014]


#SupplyChain #Risk

 



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