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The Spare Tire Strategy for Supply Chain Resilience · Modularity Podcast

• 0:00
  Every three point seven years.
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  That is how often the average business faces a supply chain disruption lasting a
• 0:07
  month or longer, according to research from the McKinsey Global Institute.
• 0:11
  Wait, a full month?
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  Every, what, less than four years?
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  Yeah, every three to four years.
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  And over a decade, those single disruptions can wipe out up to forty five percent
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  of one year's EBITDA.
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  Forty five percent, Dave.
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  Man.
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  That is a massive chunk of profit just vanishing because one link in the chain
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  snaps.
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  Right, but here is the wild thing about it.
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  Nobody sets out to build a risky supply chain.
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  It, it, it actually happens because you are doing good business.
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  You find a vendor who delivers on time, their quality is great,
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  so you reward them with more volume.
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  More volume gets you better pricing.
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  Before you know it, you are putting all your orders through one door.
• 1:02
  Right, it feels efficient.
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  You get the bulk discount, you build a great relationship, you carry less
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  administrative overhead...
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  Exactly!
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  But if you talk to M and A advisors or business lenders, the second a single
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  supplier accounts for more than fifteen to twenty percent of your cost of goods
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  sold, red flags go up everywhere.
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  Fifteen percent?
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  That low?
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  Fifteen to twenty percent, yeah.
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  Because at that level, if that vendor gets hit with a ransomware attack or a factory
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  fire, it is no longer an inconvenience.
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  It threatens your whole operational continuity.
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  Yeah, because you cannot just jump on Google on a Tuesday afternoon and replace a
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  specialized partner.
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  If you are a custom manufacturer or a trade contractor running field operations,
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  qualifying a replacement supplier takes what?
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  Six weeks to six months?
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  Six weeks to six months, easily.
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  You have sample orders, facility audits, testing specs.
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  If you do not have a second source already primed, you are sitting on your hands
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  while your key accounts walk away.
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  Man, this hits close to home.
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  Years ago, back when I was running design and dev sprints for client projects,
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  we relied on this one specialized cloud rendering host.
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  They were rock solid for three years.
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  Never had a hiccup.
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  Until they were not?
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  Until their main data center had an unannounced infrastructure migration that blew
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  up our deployments for four days straight right before a major client launch.
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  We had zero fallback.
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  I was pulling my hair out trying to rebuild pipeline scripts on a totally new
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  infrastructure at three in the morning.
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  The classic three a.m.
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  fire drill.
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  It was brutal.
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  And the worst part was, I had assumed they were infallible just because they were
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  reliable in the past.
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  And that brings us to what I call the spare tire strategy.
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  Think about it like driving a car.
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  You do not drive on five tires at once, but you carry a spare in the trunk so a
• 3:01
  flat nail in the road does not strand you on the highway.
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  So in terms of sourcing, what does carrying a spare tire actually look like?
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  Are we talking about splitting orders fifty fifty?
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  Usually no, because fifty fifty can dilute your volume discounts too much.
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  The sweet spot is typically an eighty twenty or eighty five fifteen split.
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  You run eighty or eighty five percent of your volume through your primary partner to
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  keep your scale economics, but you give that remaining fifteen or twenty percent to
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  a qualified secondary vendor.
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  Ah, okay.
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  So the secondary vendor stays warm.
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  They already have your account set up, they know your quality standards,
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  you have active billing with them...
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  Exactly!
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  So if primary vendor goes dark, you do not spend six months onboarding a new team.
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  You just pick up the phone and dial up the volume on vendor number two.
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  That makes total sense.
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  But wait, does not splitting your order raise your unit costs slightly on that
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  fifteen percent?
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  It might cost a tiny bit more upfront, sure.
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  But here is the secret magic of the second source: leverage.
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  When your primary supplier knows they are your only option,
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  what happens at contract renewal time?
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  They raise prices by fifteen percent because they know you cannot leave.
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  Bingo!
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  But when they know you have an active secondary vendor who is already qualified and
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  currently taking twenty percent of your business?
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  Suddenly those unilateral price hikes vanish.
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  The credible option to shift volume is the single best contract negotiation tool you
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  will ever own.
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  Man, that is huge.
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  You pay a tiny insurance premium on unit cost, but you gain massive pricing leverage
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  and total operational safety.
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  Precisely.
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  So if you are listening to this right now and want to fix this in your own business
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  this week, here are three quick wins.
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  Lay them out.
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  First, run a quick audit on your cost of goods sold or critical software vendors.
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  Flag anyone who takes up more than twenty percent of your total spend or core
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  workflow.
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  Step one, find the red flags.
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  What is step two?
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  Second, pick one single critical category and issue a test order or pilot project
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  with an alternative vendor.
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  Get the relationship established.
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  And step three?
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  Map out realistic onboarding timelines for your top materials.
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  Know exactly how many weeks it would take to failover if your primary went dark
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  tomorrow.
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  Building operational redundancy isn't about being paranoid,
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  it is just about protecting what you built.
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  Short term cost minimization looks great until the nail hits the tire.
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  Amen to that.
• 5:45
  If you want help mapping out your technology architecture or business strategy for
• 5:49
  resilience, head over to modularity.us.
• 5:52
  Good chatting with you, Dave.
• 5:53
  Talk soon, Ryan.