Logistics English

Case study-3
Minimising risk with suppliers.
When Edscha, a German manufacturer of sun roofs and other car parts, fileed for insolvency
early in 2009, it presented BMW with a crisis. The luxury carmaker was about to introduce a
new model- and Edscha supplied its roof.’ We had no option of going to another supplier, as
that would have taken six months and we don’t have that time. We had to help Edscha
survive,’ BMW says.
Today, Edscha is still in business, because of the support offered by its leading clients,
including BMW. However, BMW is still so worried about disruption to its supply chain that it
has increased the number of staff in its risk-monitoring department with responsibility for
component makers.
Such concerns are felt not just in the German automotive industry. Failures among
important suppliers affected many sectors, from manufacturing to retail. So how should
companies monitor whether their suppliers are getting into difficulty? And what should they
do if they get into trouble?
It is essential to maintain good relationships with suppliers. Stephan Wagner, a professor in
logistics management in Germany, says one of the simplest solutions is to communicate;
‘talk to them. That will give you a very good feel for what is going on’.
The Swiss Federal Institute of Technology (ETH) in Zurich proposes 4 steps, some already
widely used but others followed by only a few.
The first step recommended by ETH is to establish a rating system for a company’s primary
suppliers. The ratings should be based on financial information with cash flow more
important in many cases than profitability. BMW looks at a variety of issues, including the
ownership structure. It also maintains close contact with Audi and Mercedes, its main
competitors, to swap information on suppliers.
The second related system is to set up an early warning system that monitors what is
happening in the present. Such a system looks at operational issues such as whether quality
problems are increasing at a particular supplier, as well as financial issues, such as any
attempt to change payment terms.
The third recommendation is to extend the ratings and communication with suppliers
further down the chain. Professor Wagner says; ‘He points to the example of a German
carmaker where production nearly stopped after the sub-supplier of material for its seats
went bankrupt.
The final proposal is to examine the interdependence is a company’s supply base. According
to Professor Wagner, many companies with dual or multiple sourcing are confident that
they would be able to switch supplier if one got into trouble. But research by ETH suggest
this confidence may be misplaced if one supplier in a particular area goes bankrupt, the
probability increases that other suppliers in that sector will become insolvent.