Guarding against supply chain risk with small business suppliers

In the year following President Trump’s May 2017 executive order targeting industrial base security and stability, supply chain risk management has launched back into the fore in both government and industry news cycles. As usually happens with supply chain risk management, most individuals and organizations see only the emphasis on cybersecurity in the headlines and bylines announcing the order. But when taken as a whole, and combined with the anti-trafficking orders and guidelines from the administration, a more holistic approach to supply chain transparency becomes clear. Still, while this holistic approach is a step in the right direction, and while preservation of the defense industrial base is a fantastic key note in the May 2017 order, there are gaps in creating meaningful supply chain sustainability.

Supply chain risk management regularly leans heavily on technology infrastructure and managing by metrics in organizations around the world, especially in the government. Moving away from the IT side (which is addressed every day by people with more expertise in that field than I could dream of), heavy focus is placed on targeted management- from people to processes to suppliers- and institution of metrics and standards that each of those pieces of the chain are required to hit.

There’s a challenge there, as often metric- and performance-based supply chain management can go too far, and the needs and challenges of small businesses wrapped up in the supply chain are ignored. Those small firms are eventually wiped out as they struggle to keep up with requirements.

I was recently at a supply chain event in Washington, DC where I regularly heard how firms are under incredible, and always increasing, pressure to maintain and improve profits. This pressure, often highlighted as an effect limited to the big businesses we see in ‘retailocalypse’ articles, in actuality affects every node of most supply chains, small businesses included.   Where the small firms are working with big organizations that are trying to adapt and compete directly in the pressure cooker of the modern market, they’re finding themselves forced to eat into their own margins to provide higher levels of service and reliability.

A good piece of the burden of competition ends up shifted down supply chain nodes to the people that can least afford additional hits on their profitability. Small businesses nationwide struggle with banks, with managing their financials, and with their day-to-day operations already. Increasing management and other disruptions lasting even a few days can, and often do, destroy a small business. Many small businesses aren’t built to compete in our current globalized and digitized market and aren’t diverse enough in their clients- and they have no time to get there or knowledge of how to even start getting there.

These challenges are all fair as it’s we, the customers, that are demanding it. Still, that doesn’t mean that big organizations shouldn’t be aware of what they’re doing and the effects their actions will have on their smaller partners. Frequently, as larger organizations push for more and more ‘optimization’, they shoehorn their small business partners into tighter and tighter metrics and the smaller firms start to lose more and more margin. These small partners eventually give up altogether, whether by closing down or abandoning the larger organization as a customer.

Then what happens? When the large firm loses that supplier, a whole new process of procurement has to take place, and sometimes the bigger guys realize that the small guy they pressured into quitting is the only supplier of a certain need that they have. This is an especially common challenge in government and defense procurement, but happens in the commercial world as well.

Direct performance pressure isn’t the only thing that kills small business nodes in a supply chain. Sometimes a bigger organization cuts back on orders, and a small business partner isn’t sufficiently diversified to take the hit to sales and margins. This could very realistically put them out of business, again depriving the big organization of a supplier. This is shockingly common and has only gotten worse as companies have worked, often too hard, to lean out their supply chains.

While the small business owner is chiefly responsible for their own market diversification, the bigger firms bear some of the burden of understanding and ensuring the viability of their suppliers.

For long-term partnerships and to build a high-functioning team among supply chain members, there is an option that certain government supply chains have recently begun adopting as a result of executive pressure. Big organizations- like the Department of Defense- are always investing heavily in training for their own internal resources. Very recently, they have kicked off programs training their suppliers as if they’re integral internal resources in the organization. The goal of these programs is twofold- first, the DoD wants to rebuild the trust it has destroyed with small businesses over the last decade or so; second, they want to ensure their critical domestic industrial base is diversified against economic instability.

This type of industrial base building and education is especially relevant for the more rural firms that make up many supply chains. In places where small business education either doesn’t exist or is woefully inadequate for the modern business environment, bigger organizations should see the gaps and fill the need to root out the risk of supplier loss. It is critical that larger organizations- from the government to private firms and everyone in between- ensure that their industrial base is sophisticated, educated, diverse, and most importantly, motivated. At the end of the day most small businesses are an extension of their ownership, and keeping the people running those nodes up-to-date is vital.

It’s commonly known in IT that one weak point in the system, or one individual without the right knowledge at the right time, can totally cripple said system. This same principle applies to the overall business supply chain, and the risk of losing small business suppliers is real and must be managed.