Can you smell the anxiety in the air? It's our friends in Europe, who are facing an economic crisis.
While the turmoil started in Greece, the domino effects are already hitting the rest of the PIIGS nations (Portugal, Ireland, Italy and Spain). D&B actually predicted Greece's fiscal meltdown a year ago. A deep look revealed that the warning signs were there:
- Weak export competitiveness
- Inability to devalue their currency
- Rising unemployment
- High household indebtedness
- A tendency for serious social unrest with fiscal austerity
Germany, France and the United Kingdom are biting their figurative economic nails, because the EU and IMF have adopted a three-year rescue package worth EUR110bn for Greece alone to help contain the meltdown. And though this crisis may seem limited to Europe, it has potential to reach and harm U.S. manufacturers, even those with no suppliers in the affected countries. Extreme caution is merited because European supply chains are as complex and interconnected as they come.
Many suppliers in Europe rely on extended networks of smaller suppliers, often from the PIIGS nations, for critical components that are ultimately exported worldwide. What's the likelihood that these suppliers are small, family-owned businesses, and will suddenly close their doors? Extremely high. If history is the guide, and it usually is, the bad news will come as a potentially devastating surprise.
What Lies Beneath?
Supply chains are like onions, because of the many layers. Most manufacturers understandably focus on their tier-one suppliers, and occasionally, the larger tier-two vendors. Gaining insight and knowledge into more tier-two suppliers, and even the far smaller, tier-three providers, is extremely difficult, manually driven and often too costly to merit the effort. But these are the most vulnerable companies, and need both attention and scrutiny.
Companies generally focus solely on credit and financial information because it's a good indicator of financial health. In this economic environment, having a handle on a supplier's fiscal data is just the beginning, but it isn't enough to ensure stability. Manufacturers need to be on the alert for compliance, environmental and legal issues as well.
Manufacturers have been relentless in "trimming the fat" out of the supply chain for years and it's coming back to haunt them. Supply chains are so dispersed now that a meltdown like the one in the PIIGS nations could set the global recovery back by years.
Even amid this complexity, there are really just two key questions: Where is your risk, and how do you mitigate it?
Mitigating the Risk
If the biggest mistake companies make is overlooking suppliers, the other big error is moving too quickly.
- Start with a tiered-approach: Identify the suppliers whose problems could affect the business most. Engage with them immediately, insist on honesty and look beyond the financials. Identify how you can help, what's worth salvaging or determine if an exit strategy is needed. Identifying alternative suppliers is a key component of this phase.
- Use smart data: Benchmarks can help gauge whether a supplier is likely to be in serious trouble. Relevant data points include criminal charges, liens, on-time delivery stats and pending lawsuits.
- Invest in effective software: Real-time data is more available and affordable than ever before. Web-based and SaaS options further reduce the capital and time commitment previously needed.
Avoiding even a single supplier disruption quickly off-sets any investment. The Corporate Executive Board reported that the impact of a supplier failure over a three year period causes an 11% increase in costs, 7% decline in sales growth and 35% drop in shareholder returns.
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.
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