Global Risk and Your Weakest Link!

[Dr. Edward Knab]

In a global economy, supply chain risk, means you are “only as good as your weakest link”. Doing business across the globe is an inherently risky business. Supply chain managers have always understood this risk and because of it live in an uncertain universe. After driving prices down across the global supply base for the past four or five years, many supply chain managers have received plenty of accolades from senior management. However, if their supply network begins to miss critical delivers because they pushed prices down too low, find inventories insufficient too support customer service requirements, or suppliers begin closing their doors because their credit lines have dried up, management quickly forgets the dollars saved by the organization and only remember the risk they exposed the company too. This is inherently an uncomfortable position because most Supply Chain Managers only have limited risk management tools at their disposal and they are reluctant to share the significance of this risk with senior management for fear it would reflect poorly their competence.

The current environment carries with it an unprecedented level of economic uncertainty and a massive risk associated with the probability of supply chain disruption. Indeed, The New York Times recently reported that many Chinese factory owners are closing up shop without any warning to their employees or their customers. Additionally, Chinese authorities reported that 67,000 factories went out of business in the first half of 2008—before things really got bad in the global economy. This is bad news for supply chain managers, to be sure.

There is some good news for supply chain managers who are willing to confront risk, while risk can never be eliminated, it can be significantly reduced through the intelligent management of information. Today more information from the entire supplier network is available to supply chain managers. There are of course many types of information about your suppliers; we will examine three types of information; operational data, financial data and transport and logistics information.

Operational data about supply chain partners can help by providing shipment data, that can identify what is being shipped and when. You can also monitor what the supplier is shipping to other suppliers and If you see that all of the supplier's customers are ordering significantly less, you should be concerned that your supplier may not be around for much longer.

Financial data about your suppliers can sometimes be obtained from information providers such as credit agencies, public data, and supplier specific shared data. When this information is available, it can be useful in understanding ad identifying risk. An example may be that one of your suppliers isn't paying its bills on time—a sign that the company is in financial trouble.

Additionally, if you have people on the ground in the supplier's facilities, they can help you identify risk. Your people will likely notice if the supplier is rapidly cutting headcount, or if activity has dropped precipitously—both signs that your supplier is in trouble. Also, depending on your relationship with the supplier, your people may be able to get access to the supplier's books, providing another perspective on their finances.

Each of these data sources has its strengths and weaknesses. Financial data is often not available, or terribly reliable, for overseas suppliers. Operational data is best for understanding a supplier's cross-border transactions, but will not provide you with a sense of a supplier's home country business. On-the-ground intelligence is expensive (or impossible) to collect if you don't already have people in your supplier's facilities. Thus, no single source of information is sufficient when it comes to risk management. Cutting-edge companies are finding creative ways to combine data from multiple sources to effectively manage risk.

So how can you use data to effectively mitigate risk? The first step understands where you're vulnerable. It sounds obvious, but surprisingly few companies have clearly identified which suppliers are most critical to their operations. Doing so is a necessary first step to effectively managing risk.

Next, put in place a process for regularly collecting data about all of your key suppliers, make financial and performance metrics a monthly requirement of doing business. Data can come from a variety of sources. Evaluate which of these sources are available to you, and take a look at what the available data tells you about your key suppliers. The process will help you better understand the risks in your supply chain. You will gain a sense of what is important and what constitutes a warning flag.

Once you have identified a process for regularly gathering data, and you defined what metrics constitute a concern, you will need a clear set of plans describing what actions to take when concerns arise. Depending on the nature of the issue, you may choose to collect more data, hop on a plane and go visit the supplier, or begin looking for a new supplier. Regardless, having a plan of action before issues become critical puts you in control of managing risk.

Certainly, the current economy represents a risky time to be a supply chain manager; however, developing risk management tools up front will provide control and minimize your exposure to risk. Today there are better tools than ever before for confronting, managing, and ultimately reducing risk.

If your organization is struggling with supply chain risk, Supply Chain Experts can help you design a program that delivers both immediate and long term benefits to your organization. The program will be designed to shift your organizations thinking, improve innovation, and implement a program that will optimize operational performance and satisfy the requirements of your customers.

Dr. Edward F. Knab
Productivity Constructs, Inc.
800 660 8718 office
949 413 7333 mobile
[e-mail]
www.productivityconstructs.com
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Dr. Knab is an academic practitioner and seasoned supply chain expert whose company, Productivity Constructs, Inc., is focused improving global leadership and thereby creating more effective organizations and higher levels of job satisfaction. Dr. Knab can be contacted for speaking engagements, coaching, or consultation at [e-mail], [e-mail] or www.edwardknab.com.