Understanding Risk: Avoiding Supply Chain Disruption

May 7, 2009
A supply chain disruption can cost a manufacturer up to $5 million, irreparably harm a brand and drive customers straight to the door of a competitor.

Discovering that a supplier is in danger of failing once a shipment has been missed is like getting caught in a rainstorm without an umbrella. Why? Because both situations can easily be avoided.

In 2008, 35% more companies filed for chapter 7 bankruptcy than in previous years, illustrating the increasing threat of failure in the supply chain. Given the economic meltdown, it's not a surprise. Manufacturers are searching for ways to reduce exposure to supplier failure. To do so, it is important for manufacturers to have insight into suppliers' operations to avoid surprises and disruptions in the supply chain. A supply chain disruption can cost a manufacturer up to $5 million, irreparably harm a brand and drive customers straight to the door of a competitor.

Risk management has historically been managed through a financial lens. Companies were under the impression that being financially stable trumped any other obstacles presented by the supplier. But as supply chains become increasingly global, and ownership moves further and further from the original equipment manufacturer, financial health is just the tip of the iceberg. Understanding supply risk requires much more than evaluating suppliers' financial conditions. Risk factors come in many shapes -- operational, managerial, geographic and more.

These pressures are driving intense effort and initiatives to reduce exposure to risk.

Market leaders are taking bold steps: increasing transparency when it comes to supplier information; monitoring suppliers on dozens of critical factors; working with suppliers to improve stability and operational performance and extending strategies beyond Tier 1 suppliers to protect the extended supply chain.

Supply Risk Strategy Starts with Supplier Data

The first challenge of supplier risk management is compiling all supplier information into one centralized location. Should be easy. But it's not. Supplier information lives in hundreds of places -- applications, divisions, systems and more. And supplier names may be entered in dozens of ways, e.g. IBM or Int'l. Business Machines, or maybe even Big Blue. Creating an accurate, consolidated and single source of truth about suppliers is the first step.

Once the suppliers are in a single location, the manufacturer can create master supplier lists broken into categories, such as single source and global, making it much easier to monitor suppliers' performance.

This system supports efforts to implement annual recertification of all registrants and allows access to external performance and financial data. The data can also be used to drive predictive indicators, giving insight into supplier viability as far out as 12 months into the future.

This central repository provides immediate visibility into what is being spent with each supplier and how critical that supplier is to the overall operation of the supply chain.

Manufacturers can determine the criticality of each supplier by asking the following questions:

  • What need does this supplier fill?
  • How essential is this supplier to the overall operations of the supply chain?
  • How does this supplier fit into the company plan for supplier diversity and sustainability?
  • What would happen if we were to lose this supplier? How would it be handled?

Understanding the criticality of a supplier allows the manufacturer to determine on a case-by-case basis how to address risk and put into place mitigation plans should a potentially damaging incident arise.

Beyond Financial Assessment

In today's economy, market leaders are looking far beyond financial health to evaluate and make informed assessments of a supplier's risk profile. Once there's a transparent, accessible and comprehensive set of supplier information, the next step is to monitor suppliers for behavioral changes. To be successful, manufacturers need to validate and enhance supplier-funded information -- which, as self-reported data, needs to be taken at face value only -- with a variety of other factors, which contribute to overall stability including:

  • Changes in the supplier's management team
  • EPA violations
  • OSHA incidents
  • Quality issues
  • Noticeable lags in response time to inquiries
  • OFAC violations

Changes in any of these conditions can be defined as parameters for raising an alert. For example, a financially stable supplier may in fact be about to lose it CEO to retirement -- which may cause a shake-up in management -- for better or for worse. Early visibility into that change, especially for a strategic supplier, gives the manufacturer time to act -- even if it's only to call the team in to discuss the transition and what they are planning to do to ensure it doesn't negatively affect customers.

Based on the criticality of the supplier and the nature of the alert received, the manufacturer can then chose to take action, such as calling or visiting the supplier, increase monitoring or take steps to terminate the relationship with the supplier and find a replacement.

Proactive Management Across the Enterprises Raises the Standard

The third step is to develop the supplier base through an analysis of risk associated with it. This includes evaluating supplier performance, establishing forward-looking supplier scorecards and implementing plans to further develop the individual suppliers' roles in the overall operation of the supply chain.

The final stage of establishing a strong supply base is extending the supplier enterprise by creating an integrated supplier network. This includes monitoring non-critical suppliers (tier two and three) in addition to the critical suppliers. It is important to have a firm understanding of how suppliers further down the line are operating and whether or not they are encountering potentially disruptive situations. Most manufacturers know the ins and outs of their most critical suppliers; it is problems with lower tiered suppliers that typically catch them by surprise.

To remain viable in this economy risk is something that manufacturers need to learn how to manage and ultimately use their advantage. By instituting better systems to evaluate suppliers and monitoring changes, manufacturers will never again be in the position where a missed shipment is the first indication of trouble.

Jim Lawton is senior vice president and general manager of D&B Supply Management Solutions (SMS). www.dnb.com.

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