@Risk

In the current economic environment, all of us are feeling a squeeze to reduce cost.  As a result, companies are resorting to a variety of creative tactics, including increased business process outsourcing, sourcing from lower cost countries, migrating to leaner and flexible manufacturing, and implementing vendor managed inventory.  Invariably, though, many of these approaches can lead to higher supply risk. But, do we always have to choose between lower cost and lower risk?

As you might imagine, the answer to that question is complicated. I can think of many examples of lowering risk by paying more. But, I’m mot sure if that has to be the case always.  Effective risk management involves an approach that allows lowering of risk without compromising on cost; in fact, sometimes it can even provide other benefits, such as a competitive differentiator or regulatory compliance.  However, approaches like these frequently require longer term business planning.  Today, when suppliers are facing both the credit crisis and reduced demand, many companies are opting for more immediate risk mitigation by making strategic commitments with their suppliers.  For some, that means simply taking a more collaborative approach, such as sharing a longer planning horizon or inking a longer-term procurement agreement. For others, it can involve making a strategic move, such as investing equity in the supplier on the cheap.

Recently, German auto giant Daimler made headlines with a variation of this last approach. Daimler, the world’s oldest car company, announced that it will be making an equity investment in the six-year-old San Francisco Bay Area startup Tesla Motors.  Tesla, a supplier of lithium-ion battery packs to Daimler’s electric Smart Car, has been a cornerstone for Daimler’s plan for future electric cars.  Consequently, Daimler’s investment in Tesla is a win-win situation for both.  Daimler gets lower cost, access to critical technology, lower supply risk, and lower regulatory compliance risk. On the other hand, Tesla has been desperately looking for a cash infusion to invest in a new factory, and Daimler’s validation of Tesla’s technology will bolster its case for a $450M loan from US Department of Energy.  Although the companies did not disclose the actual value of the deal, it is estimated to be between $11M and $99M –a relatively small investment to secure access to the critical battery technology that would be essential for meeting future fuel efficiency standards.

By the way, it is not a complete coincidence that news of the Daimler-Tesla deal broke the same day President Obama announced the new national standard for fuel efficiency starting 2012.