Magnified Risk in Multi-Enterprise Supply Chains

March 2, 2009
Supply chain owners need to balance the needs of the entire community or they'll be powerless to achieve business continuity throughout the supply chain.

We're living it right now: foreclosures, shriveled savings accounts, small businesses hanging on by a thread, if even surviving at all. The collapse of the financial markets negatively affected not only the executives and investors of the largest banks, but reached its ugly tentacles to every last one of us.

In the same way that the interconnectedness of the financial world magnified the risk of a handful of companies' mistakes, so does our globally connected, multi-enterprise supply chain environment amplify the risk for every company involved in outsourced manufacturing.

What's Changed?

The world financial crisis has exacerbated the pressures on companies who already had their hands full with the complexities of changing from an in-house manufacturing model to outsourced manufacturing. Since this new model favors longer, multi-national supply chains and ties up more inventory in finished goods, companies seeking the planned benefits of outsourcing have become even more vulnerable to today's tight credit constraints and cost uncertainties created by volatile energy markets.

Traditionally, in-house manufacturers have used the supply chain primarily to secure raw materials or components for production. They could manage risk by walking down the hall or simply calling the responsible department to directly force reporting parties to take action. But now, as more companies rely on a web of partners and contract manufacturers (CMs) dispersed around the globe, they have less control over the supply chain community. This indirect management of partners makes for very complex challenges and supply chain owners -- along with every interconnected partner and customer -- are faced with more risk, more often.

Outsourcing manufacturing has been pursued to reduce costs and provide more flexibility, but it also puts more critical "brand values" -- such as quality, compliance, time-to-delivery -- at arm's length, introducing more risk into the equation than ever before. Add to that the overarching question of CM financial viability (100,000 manufacturers went belly up in China alone in 2008!) and risk is even higher.

The table below gives a snapshot of the increased risk as companies have evolved to this new model:

Risk In-house Manufacturing Outsourced Manufacturing
Quality Companies have direct control over pre-, in- and post-production quality measurement. Contract-driven standards and testing make quality control reporting-based. Brand owners must trust suppliers -- and their suppliers -- and rely on accuracy and validity of third-party measurement and reporting. Like it or not, the pressure of this economic climate is likely to tempt CMs and their suppliers to cut corners, so quality and compliance are at even higher risk.
Demand Responsiveness While capacity and access to materials / components is ultimately limiting, companies can change manufacturing priorities (e.g. reprioritize SKUs) with direct edict. While similarly constrained by materials / components, brand owner power is only as strong as its supplier relationships and contracts. Competition for suppliers' capacity from other companies' brands introduces further risk.

Consideration of the opposite -- cancelling orders -- puts stress on partnerships as finger-pointing for "who owns the excess inventory" can bankrupt participants. There's simply no more room to tighten the screws on suppliers. If they are able to survive, relationships are likely harmed, which constrains capabilities to the rebound at the economic upturn.
Cost Despite fluctuations in commodity and energy prices, companies maintain direct control of many costs (e.g. manufacturing efficiency, asset utilization, labor.) Brand owners face similar risk on commodity and energy prices, but risk is further complicated due to indirect control over all factors of Cost of Goods Sold (COGS.) Global sourcing locations -- e.g. the once golden China with rising costs -- are less predictable, putting the brand owner in a more vulnerable position.
Shifting to a Community MindsetBrand owning companies that rely on outsourced manufacturing require new risk management practices to ensure the same quality, reliability, and responsiveness as if they handled the manufacturing in-house.

The only way to effectively address risk and create sustainability for the entire multi-enterprise supply chain is to approach it from the community perspective. To create and maintain a new level of efficient and collaborative relationships that recognize, share, and reduce risk across multiple organizations, consider the following best practices:

  1. Community KPIs -- agree on consistent Key Performance Indicators (KPIs) that are relevant to the entire community and that create the foundation of community goals and rewards. This may include on-time delivery to reduce customer service risk, product quality to manage supplier risk, or less traditional KPIs that can be written into a contract, such as labor practices, to help avert a public or regulatory crisis.
  2. Community Forecasts -- while you can't control inevitable supply and demand shifts, you can thrive on natural market fluidity by more frequently aggregating, deconstructing, and re-aggregating forecasts to leverage the best resources of the community. Establish real-time views into demand so that you can be flexible, shifting supply timing / quantity or fulfillment responsibility to an alternate supplier if, for example, a partner cannot meet obligations. Since more powerful competition often controls supplier capacity, build strong relationships, including shared rewards with your partners to get incremental capacity in the case of a spike in demand or to respond to a supply disruption.
  3. Community Assets -- work quickly and confidently with your partners to optimize community assets and create a proactive sense and respond environment to change. Collaborative tools and real-time, cross-community visibility into your supply chain status and options will help you manage dynamic shifts in the supply chain to lower risk and increase financial gain.
  4. Community Data -- cross-community visibility hinges on timely, reliable data. Admit it: siloed spreadsheets are ineffective for multi-enterprise, community-focused supply chain management. Take inventory, which if not managed well, can lead to customer service risk or, alternately, tie up working capital in excess inventory. You must establish clear lines of real-time visibility and the integrated capability to take action in order to move inventory where you need it most, with an eye on fresh inbound supply to avoid shortsightedly piling more inventory in the wrong places.
  5. Community Technology -- traditional supply chain management (SCM) software wasn't built for a multi-enterprise, community supply chain environment, so don't waste time or money fitting a square peg into a round hole. Choose a Community SCM (C-SCM) solution built on a web-native, global platform that integrates easily with partners' existing systems. Software as a Service (SaaS) technology facilitates this by promoting easy adoption and continued use. Especially in today's volatile market, mistakes -- e.g. a container missing a transport ship or shipping reserved inventory to another customer -- are expensive. Replace firefighting with proactive community risk management by enabling the entire network of business partners to share, collaborate and act on transparent information.

Supply chain owners need to balance the needs of the entire community or they'll be powerless to achieve business continuity throughout the supply chain. All of this is put under further pressure by today's economy. But remember: with risk comes reward and a well-managed community supply chain will deliver the advantages product companies need to not only make it through this volatile market, but also set themselves up for long-term financial success.

Amar Singh is CEO of Amitive (, the pioneer of community supply chain management solutions.

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