Tuesday, 9 October 2012

PRM, supply resilience and the exponential Prisoner's Dilemma

Recently we've discussed supply risk management (SRM) and some of the issues which may be keeping Apple leadership awake at night. But SRM, or perhaps the lack of it, is becoming a fairly regular news item and even the once exemplars of procurement are not immune.  For example, there was a time when the procurement world looked to the automotive industry in awe - that was the model to be copied; the exemplar. A lot has changed. We now hear that the woes of Lotus cars could be added to, yes, by SRM or the lack of it!

The Lotus scenario is one of a 'multiple whammy': a number of the firms suppliers claim they are owed a total of £23m and are threatening legal action. The question of 'too big to fail' has re-emerged, with HMRC being asked to show some tolerance towards Lotus so that Lotus can maintain its cashflow. That's an interesting twist in itself - should HMRC agree in the hope of helping Lotus survive and look forward to a future revenue stream, or should HMRC demand their pound of flesh and risk being the straw which breaks the camel's back?

Anyway, £23m appears to be owed to suppliers at 90 days overdue, with a further £7m at 30-90 days.  If one or more of those suppliers feel they have no alternative but to sue the whole edifice could crumble - it's an exponential Prisoners Dilemma:

  • HMRC have a payment risk; 
  • Lotus are at risk from HMRC saying 'pay up now';
  • Lotus' suppliers are at risk from the decision HMRC make;
  • Lotus are at risk from one of their suppliers (as are HMRC);
  • All Lotus' suppliers are at risk from the potential actions of one their peers.
Needless to say car production is suffering too!

SRM was once little more than a potential exam question; a hypothetical - that's no longer the case. If anything the Global Financial Crisis, has increased the likelihood of catastrophic impacts throughout supply chains.  I am now coming to the conclusion that SRM or supply resilience will replace cost reduction as the #1 priority for CPO's - is it your's?  

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