What You Can't See Can Hurt You

The collapse of the economy -- and many manufacturers' key suppliers -- underscores the need for improved supply chain visibility.

Jim Lawton, senior vice president and general manager of supply management solutions at the Dun & Bradstreet Corp. (D&B), recalls a conversation in which he told a client's chief procurement officer that a supplier of the client company had been slapped with an EPA violation for mismanaging radioactive material.

The chief procurement officer promptly left the room.

"He got up from the table and said, 'Look Jim, I'm very interested in continuing this conversation -- I'll reach out to you to do it right away -- but I have to go,'" Lawton explains. "That information was that critical to him, and he had no idea it was there."

Experts say the increasing globalization and complexity of supply chains has put too many manufacturing executives in similar shoes -- out of the loop when it comes to important financial, performance, legal and compliance information on their suppliers.

"We work with a lot of companies that find out about [supplier] bankruptcies months after they happen," Lawton says. "Or they learn about them, but not in time to be able to continue to make sure they have parts coming into their facilities, and then all of a sudden they're not able to build the product that they need to ship to their customers."

Lawton notes that the collapse of the economy has precipitated supplier bankruptcies "in traditionally strong companies in all kinds of industries where you weren't expecting them," serving as a wake-up call to the importance of having real-time insight into the potential risks posed by suppliers.

"One of the lessons learned was that we often do a very good job of looking at the creditworthiness of our customers and their ability to pay us, but we don't do as good a job looking at the financial wherewithal of our suppliers," says Tom Murphy, executive vice president of manufacturing and wholesale distribution for the professional services firm RSM McGladrey Inc. "It's a very, very difficult lesson to learn."

Still, it's a lesson that manufacturers seem to be taking to heart. Lawton estimates that at least one-third of his clients now are taking steps to improve their supply chain visibility, compared with fewer than 5% of his clients two years ago. Tim Hanley, vice chairman and leader of Deloitte & Touche LLP's U.S. Process & Industrial Products group, says "no one I'm working with isn't having a fresh look at their supply chain."

"One of the things we're really seeing our clients do now is take on a more heightened focus on understanding all the risks in their supply chains," Hanley says.

Those risks have been increasing over the past decade, due to manufacturers' "relentless focus" on reducing costs in their supply chains, according to Josh Green, CEO of Panjiva, a New York City-based provider of business intelligence for global manufacturers.

"Companies, by and large, pay too much attention to the costs and not enough attention to the risks," Green says, adding that many companies were "shocked" to discover just how vulnerable their suppliers were when the recession hit. "And so when the economic downturn did hit, very few companies had invested in and developed a robust risk management infrastructure that would have given them an early warning."

While Green believes that companies are learning about the importance of supply chain visibility from the recession, he worries that they might be learning "the wrong lesson."

"I think there is a danger that [companies] are going to say, 'Ah! We get it! There's risk, and the risk is that suppliers will go out of business,'" Green says. "The reality is that risk is real, and it's exacerbated in an economic downturn, but there are actually quite a few risks."

In addition to the risk of supplier viability, manufacturers need visibility into the risks that suppliers pose to their brands -- a risk that Green places under the rubric of "social responsibility."

Manufacturers also need insight into the safety risks posed by suppliers -- an issue that has been in the headlines in recent years with the recalls of a number of Chinese products due to safety and health concerns.

Another type of risk -- "capacity risk," or the risk that suppliers will not be able to meet demand -- likely will become more acute as the economy recovers and demand rebounds, according to Green. Exacerbating capacity risk is the fact that many manufacturers have been focusing on reducing inventory during the recession, D&B's Lawton points out.

"When there's any kind of issue with a supplier, I used to have a whole bunch of inventory between me and the problem that would allow me to continue to ship to customers, and now I don't," Lawton says. "So now I need knowledge more quickly, and if I can make it more proactive and predictive, tell me the companies that I'm likely to have problems with."

A Single Global View

Lawton's conversation with the chief procurement officer mentioned at the beginning of this article illustrates the fundamental challenge facing many of the companies that come to D&B for help: How to sift through information on perhaps tens of thousands of suppliers to spot potential problems -- "before they give me a whole lot of grief," as Lawton puts it.

Lawton adds that implementing a supplier watch program, which may focus on a manufacturer's top 100 suppliers, isn't necessarily the answer, as "we run into a lot of companies that keep getting nailed by the supplier that's 150 or 500 on the list." And supply chain executives, who are tasked with doing "more with less" these days, can't just throw more bodies at the problem.

"If I have 75,000, 150,000, 200,000 suppliers and 200 people managing those suppliers, I can't have them spending a lot of time with any one of them," Lawton says. "So I really need a way to zoom in on the ones where the big problems are, know about those problems as early as I can so I can buy myself the lead time to engage with them, understand what the issues are, decide if I need to take some kind of mitigating strategy to protect myself against the risk and then execute on that strategy."

When building a supply chain visibility system, it's wise to start with baby steps, Lawton says.

"We typically recommend that you start with what you can do today and then grow that over time, because our experience is when you try to do these massive transformations, they have a much higher likelihood of failure," he explains.

For many companies, a logical starting point is to establish "a single global view of everybody I do business with," or a dashboard, that helps them understand the "interdependencies" of their suppliers, Lawton says.

"There's a particular company I'm thinking of that has 72 different ERP systems," Lawton says. " They don't have a single view of all of those companies that ties together all of the interrelationships in terms of this company is partially owned by this company, and so risk in one is potentially setting up risk in the other."

To form "a more complete view" of their suppliers, Lawton advises supplementing the available internal information with external information such as: suppliers' current financial conditions, on-time deliver histories and other performance information; OSHA or EPA violations; pending lawsuits, liens or criminal charges; and whether a supplier is named in the U.S. government's Excluded Parties List System or the Office of Foreign Assets Control's list of companies run by suspected terrorists.

Panjiva's Green asserts that the value of a dashboard is relative to the quality of the data being fed into it. That's why he cautions against "relying too heavily on one data source" -- such as credit reports -- and suggests considering the insights of "your team on the ground that's interacting with these suppliers" as another potential data source to add to the mix.

"If I'm getting three data points about a single company that are all telling the same story, I can be much more confident that I'm getting the right answer than if I'm just getting it from one data source," Green says.

One final note: RSM McGladrey's Murphy points out that supply chain executives suffering from a "10-year hangover from Y2K" should not be gun-shy about investing in software or hardware to improve visibility, as the technology available today "is significantly better than what we may have looked at in the past." Lawton agrees, noting that many companies are opting for Web-based systems via the software-as-a-service model, which offers the advantage of rapid implementation.

"Especially over the last year, because time has been such a concern, one of the first questions we get asked is, 'How quickly can I get this in place?'" Lawton says. "And the answer is, 'As soon as you can get us a list of your suppliers, we can turn on the system tomorrow.'"

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