Toyota consistently ranks among the most respected global corporations and is well-known for their manufacturing prowess and strong supplier ties. That’s exactly why this week’s news about the accelerator problems for 4 million vehicles came as a shock to so many of us. The impact of this episode will be long-term, far-reaching, and very expensive.

Supply risk specialists speak often about the three distinct kinds of supply risk (Brand, Commodity, and Disruption). While this episode at Toyota may not have hit a trifecta, they are certainly dealing with an awful daily double. The only thing that might be more expensive than the disruptions in their supply chain could be the hit to their brand.

If you think that only your biggest suppliers need to be involved in a formal supply risk management program (e.g. automated alerts and scorecards populated by both objective and subjective data inputs from various sources as one component) and the rest can be covered with just some historical financial information/ratios, on-time delivery ratios, and maybe an annual business review, think about the fact that CTS is almost certainly not even in the top 500 of Toyota’s list of largest suppliers.

The important point for you is NOT what happened at Toyota. Toyota will obviously and thankfully weather this storm and, down the road, repair their image.

What matters is this: If an event like this…

• Can be linked to a small(ish) supplier
• And cause so much damage
• At the world’s most respected auto manufacturer

Then all of us have reason to be very afraid. Tomorrow morning, we also need to ask some very tough questions of ourselves and our supply chain and procurement leadership.

1. Are we really running a thorough enough risk management process (including Finding risk, Fixing them, and Follow-through on Monitor/Management)? Most organizations only do parts of this 3-step process well or have the proverbial “binder on the shelf” risk assessment that was out of date three minutes after it arrived from the printer.
2. Are we executing this process with enough of your supply base? Most organizations execute on just a small slice of strategic suppliers. Most organizations employ some basic supplier stratification measures based on size, but this episode underscores the importance of deploying a more holistic and systematic approach to tiering and managing suppliers that includes risk.
3. Do their people have the right capabilities to manage risk across your supply chain? Most organizations do not have both the skills and bandwidth required to conduct risk management at any broad level of activity.
4. Do they access to the right information (i.e. audit trail)? If (when) something is to go wrong, you’ll have the information you need readily available about the expectations you set with suppliers, how you monitored their compliance, and how you graded them along the way.

Depending on the answers you hear to these questions, you will probably want to take a closer look at that Supply Risk Management that’s been on your “nice-to-have” list for such a long time.

There’s no telling the final costs associated with a major supply risk event. The only thing you do know for certain is that an ounce of prevention weighs a lot less than a pound of cure.

Mark Oser is a director in the Ariba Global Services organization. He specializes in helping large organizations develop and execute complex sourcing, risk and procurement initiatives.