Massive Recalls: Where Is Your Supply Chain Vulnerable?

Expect suppliers to fail but don't let them take you with them.

Will Toyota recover? Maybe. But one sure consequence of the devastating series of announcements in the past few weeks is that supplier relationships are being scrutinized like never before and not just those in the auto industry.

The concept of trust is eroded; the possibility of key providers reporting misleading information about quality tests is extremely real and costing millions, before the brand 'repairs' even begin.

The latest culprit is Koito Industries, announcing it will recall 150,000 seats used in Airbus and Boeing planes, after submitting inaccurate safety data. And if more proof were needed that the supply chain is an interconnected web, Koito's parent company is a Toyota supplier, to boot.

Based on the current relationship in place between many manufacturers and suppliers across industries, collaboration may seem impossible in an environment steeped in mistrust, but it's the only option. Every manufacturer depends on broad networks of suppliers and their subcontractors. The more distant a provider is, the greater the risk, because quality controls are less tightly connected to the prime contractor. And to be honest, these outlying vendors may not care that much as they often work across cultural divides and time zones, and never even know where the final product ends up.

Adding to the pressures: Lean supply chain strategy are coming back to haunt manufacturers. Manufactures simply don't have the tools to manage the suppliers they depend on. As a result, they're running blind, with almost no visibility into risks that could jeopardize their product, and their customer. That's only the short term; the long-term impact is far worse: their brand and their business are now placed at unacceptable risk.

The market research firm AMR Research Supply Chain in Gartner insists that manufacturers and their vendors can have 'relationships.' "It's more than managing transactions and controlling costs," said Mickey North Rizza, Research Director. "It is about finding value for both parties and working together to deliver a high quality end product. The big three: cost, quality and reliability."

Nice ideas, but it's even smarter to protect yourself. These three essentials strategies apply to anyone doing business with any provider, of any size so it won't end up on the wrong front page:

Go Naked

Drop the 'Curtain' Manufactures need to be more forthcoming and open with their own operational data and information. If it's a relationship, be honest; the actions of one affect the success of the other.

Expect Suppliers to Fail

Don't let them take you with them. Suppliers under business stress may be more likely to cut corners. Others have patterns of this behavior, which may stem from cultural pressures to hit targets at any cost. Koito Industries was prohibited from serving European airlines in 2009 by the European Aviation Safety Agency, because of earlier falsified data. Red flags like this are easy to identify, if you're looking.

Check Your Data

Not everyone's lying. Most companies want to do the right thing, but are dangerously at risk, especially in the current economic downturn. Having a warning system that flags potential supplier uncertainty -- at least two quarters before an event could occur -- is critical. It's also highly available. Most routine financial snapshots aren't good enough, because they're backward-looking; you want data that focuses on the future.

Jim Lawton is senior vice president and general manager of D&B Supply Management Solutions which combines global business insight and technology to help reduce supply risk. www.dnb.com.

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