Single-source alloy supplier in a seismic zone
Cobalt Components Ltd manufactures battery housings for electric vehicle suppliers. Its only source of a specialised aluminium alloy is a single mill in a seismic zone; the mill supplies 100% of Cobalt's requirement under a two-year contract with a 90-day termination clause. Cobalt holds six weeks of alloy inventory. Its customer contracts include penalties of £250,000 per week for late delivery, and one major customer represents 40% of revenue. The risk register records 'supplier failure' as likelihood 1, impact 5, with no treatment plan. Procurement has obtained a quote for dual sourcing from a second mill: it would add 12% to alloy cost (£1.8m per year) and require 14 weeks for qualification. Property insurance covers Cobalt's own buildings and stock but not business interruption. The operations director argues that the mill has operated for 30 years without interruption and that dual sourcing would make Cobalt uncompetitive.
1. Critically assess the risk register entry for supplier failure and the likelihood rating.
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The entry is weak. A likelihood of 1 (rare) is asserted without evidence or timeframe; the mill's 30-year record is not a forecast, and seismic risk is not stationary. Impact 5 is plausible but the register does not quantify it: lost margin, £250,000 per week penalties, customer loss and recovery costs are not estimated. There is no owner, no controls, no treatment plan and no linkage to the 40% customer concentration. A 1x5 score also hides the possibility of a low-probability but catastrophic event whose expected loss may still justify action. The register should record cause-event-consequence, existing controls (inventory, contract clause, insurance), residual risk and risk appetite. The 90-day termination clause may give little protection if the mill stops production; six weeks of inventory leaves a gap before a second source could be qualified after 14 weeks. The current entry therefore understates the risk and provides no basis for a decision.
2. Evaluate the treatment options for the single-supplier risk using the risk treatment hierarchy, including cost-benefit and residual risk.
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Apply the hierarchy:
- Avoid: exit the product line or redesign to use an alternative alloy. Probably disproportionate, but should be considered.
- Reduce: dual source, increase inventory, qualify alternative material, improve supplier monitoring, negotiate service credits or priority allocation.
- Transfer: contingent business interruption insurance, contractual penalties, customer contract renegotiation.
- Accept: retain residual risk with explicit board approval.
Cost-benefit: dual sourcing costs £1.8m per year plus qualification. Compare with expected loss. If the probability of a disruptive event over two years is 5-10%, the expected penalty alone is £250,000 per week x 8 weeks x probability = £1m-£2m, before customer loss. A 12% cost increase may be justified for a critical component, or a partial dual-source (e.g., 30% of volume) may be proportionate. Inventory increase is a temporary treatment; it ties up cash and may not cover a long outage. Business interruption insurance may be unavailable or limited for supplier failure, so check contingent cover. Recommend a portfolio: qualify a second source, negotiate priority allocation, raise inventory to 10 weeks during qualification, cap penalties where possible, and set a board escalation trigger.
3. Recommend what Cobalt should report to the board and which indicators should trigger escalation.
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The board report should state the risk description, cause, quantified impact range, current controls, residual rating, appetite position, treatment options with cost and expected risk reduction, owner and milestone. KRIs should include: supplier on-time delivery, mill production alerts, weeks of alloy inventory, qualification progress for the second source, single-source share of spend, and customer penalty exposure. Escalation triggers should include: inventory below four weeks, any interruption notice from the mill, qualification slip beyond 14 weeks, or a customer order that increases concentration above 40%. The board decision required is to approve dual sourcing or to accept residual risk with an explicit rationale and review date. The board should also require a review of concentration risk across other critical suppliers and a documented contingency plan.